Image by RambergMediaImages via FlickrFinancial spread betting on stocks and shares provides many of the same benefits as purchasing actual shares, but without the stamp duty, commissions, and large sums of capital needed to realize a good return. By utilizing the services of spread betting companies, traders are able to speculate on the performance of individual stocks and shares, without ever taking ownership of the specific instruments involved. Rather, spreadbetting speculates on the rise or fall of stocks and shares over the course of a day, month or other period.
Spreadbetting on stocks and shares is a popular trading vehicle that permits traders the same exposure to a stock as a traditional investor, but at only a percentage of the capital. Add in the benefit of tax savings, since spreadbetting is not subject to capital gains or income tax in the UK, and traders have the opportunity to retain more of their returns (of course tax rules in any country are subject to change). The process is rather simple and the deposits required are minimal.
To illustrate how financial spread betting works in terms of stocks and shares, consider the following example. Company A is expected to announce quarterly income results in just a few days. According to news reports, the company is not realizing the level of profits it anticipated earlier in the year. Coupled with rising raw materials prices, a trader believes that stock prices for Company A will fall after the quarterly statements become public. As such, the trader decides to go short, or open a sell bet on Company A.
Spread betting companies list the spread price on Company A as 180p-183p. The trader places a bet at 10p per point at the sell price of 180p. He chooses a rolling daily bet, meaning the bet rolls over automatically to the next trading day, and each subsequent day, until he places a bet in the opposite direction. The first day of the announcement, stock prices fall to 175p, then fall again to 172p the following day. At this point in the process, the trader has realized a change of 8p at 10p per point. His total returns are 80 pounds.
The trader now believes the prices have dropped as much as they are going to, so he places an open buy bet according to the most recent spread price and waits for the stocks to begin climbing again. A new spread price of 172p-175p is issued, so he places an open buy bet, called going long, for 10p per point, starting at 175p. This time, however, the trader chooses to only bet on the current day's trading. At the close of the market, stocks in Company A have risen to 176p. He realizes a gain of only 1 point or 10p, for a total gain of 90 pounds tax-free over three days of trading.
Spreadbetting, like any other trading vehicles, presents a risk to traders. While spreadbetting offers traders the possibility of solid returns for little capital outlay, it also poses risks should the market move in the opposite direction of a trader's bet. It is possible for a trader to lose his entire deposit or considerably more, owing to the rate of exposure.
Michael Brooks is passionate about spread betting. Whether it is stocks, exchange traded funds, cfds or indices, Michael keeps his finger on the pulse of the industry.
