Spread Betting Frequently Asked Questions

Trading With Financial Spread Betting

Spread betting is extremely popular in the UK, and its trend of growth is one that is continuing at a steady pace, with some 60,000 new accounts opened across the markets every single year. As new traders learn of spread betting as a profitable, tax-efficient trading medium, and the public at large becomes more attuned to the existence of spread betting and the opportunities it presents, the increasing profile of spread betting will only continue to deliver more willing traders, not to mention the increasing number of brokers springing up to satisfy excess demand.

As a tax-efficient, low-cost leveraged way of investing in the markets, spread betting satisfies a need for cheap and efficient trading across professional and individual trader markets.

In the eyes of UK tax law financial spread betting is a form of gambling, indistinct from spread betting on football or golf, or from playing a slot machine or roulette. However, the spread betting industry is regulated by the Financial Services Authority as a trading activity, and most traders see themselves as anything other than gamblers.

The term 'gambling' denotes taking a punt, taking a risk on an outcome that is determined by substantial elements of chance. While there might well be one horse that's faster than all the rest, it may have an off-day, or it might not feel right ten minutes before it races - these are factors you cannot predict, factors you cannot control and factors to which you surrender your destiny when gambling on a horse.

The markets are considerably different. A company publishes reports and information which directly affect its performance, and the markets respond in kind. While some investors do take large risks on a hope and a prayer, the majority would consider themselves to be adopting a more skilled approach to making their money, more closely aligned to the discipline of other financial traders rather than gamblers. Bear in mind that professional traders and funds also use spread betting as an investment vehicle.

While tax laws favour spread betting as a gambling activity, it is widely considered to be more of a financial, trading activity than a pure gambling endeavour.

One of the key advantages of spread betting is that it is taxed accordingly to considerably more favourable rules than other forms of trading. Essentially, spread betting is regarded by UK tax law as a gambling activity, and therefore the profits from spread betting are tax free - i.e., there is no capital gains tax to pay on the earnings generated. Because spread betting is based on asset prices, rather than trading in the assets themselves, it is also exempt from stamp duty, which when added to the CGT saving makes spread betting an even more attractive investment style.

Spread betting can attract tax liability in the instance that it becomes the trader's main source of income, at which point earnings are subjected to income tax according to the normal income tax laws. However, for the most part spread betting is a potentially highly lucrative, tax free form of trading.

Spread betting can be used as a main source of income, but it shouldn't be the only iron you have in the fire. While floods of would-be spread bettors flood onto the market every year, only a small proportion of them will ever go on to generate a full-time income from their spread betting. Such is the difficulty of spread betting (and trading on the whole), most will give up sooner or later, and probably when they are substantially out of pocket. But for those who are prepared to put in the hard work and learn their trade, the rewards can be considerable.

It is possible to make your living from spread betting, but you shouldn't expect that to come easily, and many traders spend years trying to refine their trading style in order to get to that stage. While spread betting can be extremely profitable, it can also be extremely dangerous where wayward positions are allowed to run in to your trading capital. In other words, spread betting can be a highly risky business unless you get your emotions under control and learn the ins and outs of the game.

The more time and energy you invest in your own knowledge, the more likely you will be to succeed over time.

Spread betting is inherently risky, given the nature of the transaction. When a spread betting position moves up by 10 points, the return is 10 times the stake. When a position moves down by 10 points however, the loss is still 10 times the stake - that's 10 times more than was invested up front. And with financial markets, there's virtually no limit to the number of points a position can win or lose, which could land you in serious financial trouble.

Fortunately, there are ways in which you can counteract the risks of spread betting. Firstly, you need to be aware of the potential risks you're facing, and you should always work out the numbers before making a particular trade. You might feel comfortable at 10 a point, until you realise that you could rack up a massive debt over a trading hour. Don't get greedy, and remember that you can win and lose in equal measure.

It is also possible to position stops with the broker which prevent your liability from running away into problem territory. By setting stops below the level of comfortable risk for each transaction, you can automatically cut out your losses before they become too significant.

In a word, no. When shares are bought, they come with corresponding rights and responsibilities - the right to vote in corporate decisions such as choosing the board of directors, the right to a dividend (i.e. a share a profits), and the responsibility to keep the company broadly on the right track. These obligations are tied up within the nature of a share - they are fundamental to what a share is and its function, with the ability to speculate on their prices as a definite secondary effect.

With spread betting, you don't actually acquire any assets, other than a contract with the broker to execute the spread bet. This means there is no CGT or stamp duty payable, but also means that you don't receive any of the rights of a shareholder. Whether you're backing a company at 10p a point or 10,000 a point, you will have fewer rights and (responsibilities) than a trader with one share.

One of the core benefits of spread betting is that earnings are totally uncapped, with the potential for traders to ride the market for as long as they like. This feature of spread betting has made millionaires, and makes spread betting inherently attractive as a trading style, with every single upwards point an extra multiple of your initial stake.

And traders should have no fears about their brokers capping winnings - remember that brokers have your position covered, either through other traders or hedging on the futures market, and so prefer traders to succeed. After all, successful traders are likely to place larger wagers, and execute more frequent trades, which will all contribute to the bottom line of the broker.

Currency fluctuations can caused considerable problems for traders investing in assets priced in foreign currencies. This can often lead to a situation where gains in an asset's price are eroded, matched or even outweighed by movements in the currency markets, thereby hampering profitability.

For example, an investment in General Electric shares on the NYSE might yield a 5% return, but it the USD has risen 6% against the GBP, this actually results in a loss for the trader - in spite of an otherwise successful position.

While share trading and CFD trading open up exposure to currency fluctuations, spread betting is kept immune from the currency markets, because the whole transaction takes place on the basis of the foreign asset, but in your native currency. This means, in the same scenario as above, your 5% rise in General Electric would be translated into many multiple times your stake in GBP, with no exposure to currency values whatsoever.

Spread betting was initially devised and introduced as a vehicle for enabling individuals to invest in gold without physically having to enter the gold market. Today, the choice for spread betting markets has been opened up significantly, to take in a broad range of instruments, commodities, assets and indices.

While the range of markets offered varies from spread betting broker to broker, they can be broadly classified into six categories:

Indices: major world indices such as the FTSE, DOW JONES, DAX, S&P500, etc.

Stocks: shares in UK based and foreign listed companies are widely traded via spread betting including FTSE100, FTSE350 and AIM listed stocks.

Currencies: major world currency pairings, including GBR/USD, EUR/GBR, EUR/USD

Commodities: both hard and soft commodities are traded, including oil, wheat, corn and, of course, gold.

Interest rates: interest rates across the globe can also be used as a basis for spread betting

Bonds: bond prices can also provide an index on which spread bets can be placed.

Brokers And Trading Accounts

You can get started spread betting with as little as a spread betting account and an initial deposit. Simply by choosing a broker and depositing your capital, you can access the markets virtually instantly (after your ID is verified and any credit checks are complete) - there are very few barriers to entry when it comes to the act of spread trading. However, that's not to say you will be successful, and you are strongly advised to spend a few full days, weeks or perhaps even months getting to grips with what spread betting is, how it works and the behaviour of the markets. Spread betting takes no prisoners, and it makes no excuses for trader ignorance - success depends to a massive extent on being competent and capable of executing logically sound trades as part of a sensible, sufficiently cautious trading strategy.

This is a concern held by a number of traders, yet it is erroneous and irrelevant when it comes to personally profiting from financial spread betting.

By and large, spread betting companies don't need to hedge every position on the markets. Spread betting platforms take a variety of bets in contrasting directions - some win and some lose, which results in a balance of winners and losers. Your winning position will initially be hedged against losing positions elsewhere across the broker's client base, with the remainder being hedged on the markets to guard against hefty losses.

Ultimately, whether or not the spread betting broker hedges against your position is a business decision that has to be taken by the broker. From a personal point of view, there is no damage that can come to your portfolio as a result of a hedging move from your spread betting broker.

For new traders just starting out in spread betting for the first time, choosing a demo account can be a great way of getting to grips with the fundamentals. Spread betting really does make more sense in action than in words, and it's always advisable to sign up for a demo account (invariably free of charge) with a few brokers in order to learn the ropes and get a better understanding of the core practicalities of analysing the markets, choosing a position and executing a trade.

Don't forget that demo accounts can also be a great way to get a feel for a particular broker and their platform. This can help make it easier to choose a spread betting company later down the line.

However, there are also benefits in trading real money straight away, with some brokers starting from as little as 10p a PIP. Depending on the platform you choose, your demo account may have restricted functionality in comparison to a live account, and there can really be no substitute for learning mistakes from losing your own money - even if it is just a couple of pounds to start with.

For those just starting their spread betting journey, both a demo account and a live account are must-have short-term considerations.

When it comes to choosing your spread betting provider, the absolute first point on your checklist always has to be FCA regulation. The FCA (Financial Conduct Authority) have oversight over the entire financial services industry, and subject companies to strict rules, guidelines and regulations that are designed to protect traders.

The big bad world of the markets can be and is a ruthless place to do business. Market abuse, insider trading and other distortions are common place, and it is the job of the FSA to guard against these unfair and potentially very costly problems.

Trading with an FCA broker gives you the peace of mind to know that you are dealing with a reputable, legitimate outfit who are legally bound to treat you fairly, and in any event that your trading account is protected to the tune of £48,000 by the authorities should the broker collapse.

Is FSA regulation important when choosing a broker? It's critical.

Choosing whether to trade forex via a dedicated forex broker or a spread betting platform comes to down to whether or not you're looking to specialise in forex trading. Forex brokers allow significant leverage for their investors, but doesn't give rise to the tax benefits of spread betting. Likewise, forex brokers offer a limited range of investment opportunities, focusing solely on the forex markets, as opposed to spread betting brokers which tend to offer a variety of different markets, indices and investment bases.

For more cost effective trading, with tighter spreads and considerable tax advantages, spread betting wins hands down. Additionally, by signing up to a spread betting rather than a forex broker, you can keep your options open as to which markets and indices you trade on, rather than limiting yourself to just dealing in currency pairings.

Spread betting doesn't come with strict rules as to how much you need to deposit to get involved. The barriers to entry are minimal, and it is possible to start trading from as little as 10p a PIP.

However, given the leveraged nature of the losses you can sustain, it's important to deposit an amount that leaves breathing space for wayward transactions and allows a diversified trading approach. For a deposit of 500, for example, it is advisable to trade at no more than 1 a PIP - this can still provide fantastic returns when trades go well, without being too detrimental to your trading position when a single trade goes wrong.

Furthermore, with money to play with you can invest in a variety of different markets to help spread the risk and increase your chances of delivering a profitable outcome overall.

Part of the beauty of spread betting is that there is no need to be chained to your trading desk throughout the day. Positions can be set to respond to stop losses, which automatically cut out positions when their value falls to a certain level in order to help limit your liability on wayward trades.

Furthermore, a number of brokers have now introduced mobile trading platforms, allowing spread traders to access their account on the move via their mobile handsets. This enables positions to be opened and closed along with a variety of account management functions, making it possible to fully engage with the markets on the move.

For the technology averse, some spread betting brokers will also take trading instructions over the phone, so you can operate your account remotely by telephoning instructions to the broker. While this has the disadvantage of a lack of immediacy, it is nevertheless usually sufficient to help cope with any market changes and to prevent significant losses or to bank profits if the markets change while you're out and about.

Financial spread betting was born in the UK, but it is by no means exclusive to British soil. While the concept of spread betting has taken time to develop outwith the UK, some European and Commonwealth markets are starting to adopt spread betting within their own financial systems as the product improves and evolves with time.

Germany, Ireland and Spain are amongst those that also offer financial spread betting to traders, in addition to Australia and a number of other countries that are considered ripe for expansion. Rest assured that as brokers continue to grow and spread their wings, spread betting as we know it will continue to flourish across new territories where financial regulation and regional laws permit leveraged trading of this sort.

Similar, but not the same. For the most part, demo accounts utilise the same functionality as their live counterparts, although this is by no means a guarantee. While the idea is generally to give trades an understanding of the platform and the basics of spread betting, some brokers build in slight differences to their free and real account versions, making the trading experience within demo account from time to time more restricted than trading for real.

But perhaps the main difference between demo accounts and live accounts is the learning experience they can offer. While most traders would tend to default to a demo account as the main source of their trading education, there really is no substitute for raw experience. Losing 10,000 virtually will never come close to losing 10 of real cash, and the distinction is an important one for helping to shape trading strategy and understanding.

This is a 'how long is a piece of string' type question, and there can be no definitive, catch-all answer to which spread betting broker is the best. The market is absolutely saturated with choice for traders, to the extent to which some may be more suitable than others depends on a variety of factors - including your experience level, required functionality, and the range of markets you're interested in trading.

That said, there are a few key factors you should bear in mind when it comes to choosing a spread betting company.

Trading cost: the tighter the spreads, the less each transaction will cost you. The spread is the trading commission portion factored in to the structure of a trade, and the slimmer this gap the better. Bear in mind that while a one PIP difference might not seem a lot, multiply that by hundreds of PIPs, multiplied by your average stake and you'll soon notice a hefty difference in trading cost.

Margin requirements: checking out the different margin requirements offered by brokers will allow you to determine how much deposit you will need to start trading. Lower margin requirements mean less money is required upfront to fund your trading activities.

Range of markets: choice in the range and variety of markets on offer is an important consideration, because you want ideally to have as wide a range of choice as possible. A spread betting broker with one or two markets is hardly ideal for a trader looking to spend a serious amount of time and money trading the markets, and as you develop and hopefully build on your spread betting experience, it is likely you'll want to spread your wings and sample other markets.

Spread betting brokers are, by and large, reputable bodies that provide an excellent service to their clients. However, that doesn't mean there aren't some rogues out there, determined to pull the wool over the eyes of unsuspecting investors.

You should be cautious when dealing with any organisation online, but there are ways in which you can help ensure legitimacy - primarily through regulation. Spread betting brokers in the UK should always be FSA regulated and authorised. This helps guarantee that they are operating within FSA rules, which are focused on protecting investors from market abuses and foul play, and guarantees a protection of your trading account up to 85,000 should the broker fail.

Bear in mind that some brokers are now based offshore for tax reasons. This doesn't necessarily mean that they are illegitimate or unscrupulous, but it is important nonetheless to make sure they are appropriately registered, authorised and regulated in their base jurisdiction. This can help ensure you have similar safeguards against unsavoury business practices.

independentinvestor.com only reviews and compares fully regulated and authorised spread betting providers.

Competition in the spread betting markets has intensified in recent years, as a result of an increasing profile of spread betting amongst the everyday consumer. As demand for spread betting has risen, so too have a number of new providers thrown their hats into the ring to compete for this lucrative new business. A quick glance at our comparison table will give you some idea of the range of competition that's currently out there, vying for your business, and with continued growth for spread betting over the coming twelve months, the growth in broker numbers shows no sign of stopping.

In addition to new brokers, white label partnerships with banks and bookmakers online are becoming increasingly commonplace, which is adding to the range of choice available for spread betting consumers.

For traders, this is fantastic news. The more players there are in a market, the more weighted the market becomes, in favour of the trader. That means tighter spreads, better trading resources and an enhanced range of trading options, as these providers are forced to compete with each other.

Spread betting providers determine their prices according to the value of the underlying market in the relevant asset or index, combined with the degree of market liquidity. This is designed to produce a different result from the spot price at a given time, because it reflects the reality of the market situation rather than the temporary trading levels.

In order to accurately arrive at pricing that factors in both the underlying market and liquidity, brokers turn their attention to the futures markets as a signifier of pricing. Futures are far more liquid instruments than underlying markets, thereby presenting a more accurate reflection of true value. This is designed to help protect the spread betting brokers, by providing them with more cover for market movements.

The prices quoted by the spread betting broker not only largely reflect the futures prices in the same instrument class, but also factor in a margin for their commission - i.e. the spread. Where there is no obvious underlying market or obvious price base for a spread, the broker will turn to algorithms and formulae in order to output prices, similar to the way in which bookmakers set their pricing, in order to make up for the lack of market price transparency.

While the brokers are interested in covering their own backs as far as pricing is concerned, that doesn't mean its impossible to win - in fact, brokers tend to prefer successful clients who trade with them time and time again, resulting in more transactions and more spread commissions for them.

Spread betting companies make their money primarily from the spread portion on each transaction - i.e. the difference between the buy and sell price of a market. Spread betting is commission free, so there is no percentage charge incurred on each transaction - the sole way in which they generate revenue from each trade is via the spread, which is often as slim as one PIP.

For example, if the broker is quoting 6000-6001 on the FTSE100, the one point difference represents their commission, and will widen or narrow depending on the liquidity of the market - thus, FTSE shares will come with narrower spreads than AIM shares, and will cost less to trade as a result.

While it is a common misconception that spread betting brokers will their clients to lose, much in the same way as a bookmaker, this is not in fact the case. The broker's exposure is hedged on the futures market to cancel out (and possibly even profit) from open trading positions. Remember that it is the spread that brokers profit from, so the more transactions, the merrier, as far as they (and their shareholders) are concerned.

Binary Betting

Binary betting is similar to spread betting in a number of key areas, yet its main distinction is held within the name. A spread bet can close one point up or down, or it can close 100 points up or down - a binary bet is much more black and white. Binary bets provide fixed odds for investors, with fixed earnings and loss limits. If a binary bet is successful, it is settled up at 100, with the difference between the 100 and the buy price giving the multiple of return for the stake. If a binary bet loses, it is settled at 0.

Binary betting is popular because it provides a certain flexibility that isn't available with other trading tools, and additional flexibility for traders is always a good thing for hedging risk and presenting a greater variety of profitable trading scenarios.

Trading Strategies

The risks of spread betting, while significant and ever present, can be managed in several key ways. Functionally speaking, stop losses can be used to guard against runaway positions, and to determine a preset price level at which your position will be closed. These are usually set at the level of the maximum risk you are prepared to absorb on a trade, and require careful planning and a few calculations to make sure their positioned correctly.

Another way in which you can personally limit the risks of your spread betting is through understanding the markets you are trading, and by keeping on top of developments affecting both your market and the assets you are trading within it. Bear in mind that you are trading alongside professionals who dedicate their entire working week (and then some) to reading about the markets - if you want to gain even a fraction of their success, it's crucial that you too put in the legwork to help mitigate your potential losses through better, more consistent trades.

Trading without a plan is like driving with no directions - chances are you're going to get lost along the way. Most people go in to spread betting to make money, but that's far to wide an objective to base your entire trading strategy upon. Therefore, developing an understanding of trading strategies, and how you can best arrange your portfolio for maximum effect is a crucial step on the road to spread betting success.

Devise a trading plan that encompasses both an approach to research, a trading strategy and a long-term strategy, and you'll find you are far better placed to make a success from your spread betting than were you to run at it blind.

There is no straightforward answer to this question, because there are so many different and equally effective spread betting strategies, all being used by traders around the world as we speak. Some traders are looking to profit from long-term corporate growth, while others prefer to move in and out quickly in order to profit from a falling share price. Some traders are technical boffins who love getting stuck into the raw data, whereas others trade on instinct and wider economic goings on. There's no right or wrong answer - whatever strategy works for you is the best strategy for you to pursue at that time.

The best advice you can receive about trading strategies is to familiarise yourself with a handful to begin with. Learning one or two strategies you can use to get started can be a good way of finding your feet in the spread betting markets, and in doing so you can start to build up your trading capital. Only then might you consider branching out to increase the opportunities for earning from your financial spread betting.

Spread Betting vs Other Investments

Spread betting is advantageous to the trader because it provides a flexible opportunity for leveraged, tax-efficient investment. Spread bettors can profit from both rising and falling markets, and their positions are highly geared to deliver multiples of return. By the very nature of spread betting, the minimum rate of return you can expect to see on a winning trade is 100% (i.e., where the position makes a profit of 1 point), thus the opportunities for significant earnings from spread betting are staggering, and a strong incentive for traders.

Spread betting is also beneficial from a tax perspective, and is free from both capital gains tax and stamp duty in the UK, by virtue of a favourable quirk in UK tax law. Furthermore, with 24 hour a day trading, and an even wider range of instruments and asset bases than other investment types, spread betting is particular popular as additional weapon of choice for traders.

Spread betting and CFDs are broadly similar investment products, with both delivering leveraged returns as margined products. However, they also have several key differences, which distinguish the two rather than promote one above the other.

CFDs are the investment vehicle of choice for professional traders because their pricing more accurately reflects the underlying market, rather than the futures market. This allows traders to capitalise on the liquidity factor, which is already built in to the spreads with spread betting.

Spread betting, on the other hand, has the advantage of being tax-free, with minimal exceptions. This can transpire to make spread betting more cost effect than CFD trading, so the answer as to which investment style is better depends more closely on your specific needs as an investor.

Spread betting and share dealing are fundamentally different animals, although it is possible to spread bet on share prices. Share dealing is seldom as leveraged as spread betting, and is more suited to long-term investing. This is because the returns from unleveraged investments are comparatively smaller. Similarly, the barriers to entry with share dealing will usually be considerably higher than with spread betting, where traders can get involved from as little as 10p a point, and the flexibility of dealing in shares comes nowhere close to the variety of options (long, short, etc.) afforded by spread betting.

Spread betting on the other hand is highly leveraged, although also highly risky. Its favourable tax treatment over share dealing makes it potentially more cost effective, while the enhanced flexibility of being able to trade in both directions and on a wide variety of distinct markets makes spread betting a popular and potentially highly lucrative choice.