Spread betting companies are now providing exposure to financial markets that are often asked with a very straightforward question, “why should investors utilise them in order to derive exposure instead of investing in the markets directly”?
There are several number of answers to this query, which if collated explains why the industry has expanded so quickly in recent years.
among the first reasons why people regard spread betting as a favourable tax treatment is that it attracts people who are risk takers. As with similar types of gambling, tax is payable at the instance the bet is placed instead on the actual profit.
With spread betting, tax is consolidated in the spread, in effect this results in a tax-free manner of trading. By contrast, investing on financial markets directly can result in traders facing spiteful capital gains tax credits should they make substantial profits.
This basically means spread betting can offer considerable savings over direct investments on financial markets. Nevertheless , the tax saving is normally the starting point for investors. It tends to be one of the reasons to be considered why in the first place traders consider spread betting rather than the thing that actually persuades them to take the risk.
Other benefits offered by spread betting companies is that it opens the global markets that would not previously have been made accessible to many investors. For instance, the first advantages identified by experts is that all leading spread betting firms consider that the dollar exchange rate with other leading currencies are among their most popular trades when in fact investing directly on the foreign exchange markets is not feasible for most individual investors.
Similarly, whilst it is possible for investors to purchase international shares directly, many investors are still put off by the higher commissions that traditional stockbrokers tend to charge on such trades.
As for the option of selling short, there aren’t enough investors to take full advantage of it and some investors don’t think it is the right move to profit from a falling price, while others just haven’t started thinking about this option.
With shorter trades beginning to entice newcomers, and spread betting being the suitable option for short selling, trades are likely to be executed in a matter of days and possibly even under a few hours. By contrast, spread betting is much less practical for speculating over the short term.
The ability to trade on margin is another essential advantage of spread betting which makes it possible to get additional exposure to large investments with only a small stake utilising spread betting. In order to take a £10,000 on shares in a FTSE 100 company via spread betting firms, it would only cost as little as £100, by contrast it would normally cost £10,000 to invest direct.
Furthermore, margin trading doesn’t simply reduce the cost of investing it likewise increases the risk and reward profile of a given trade. For example, a £50 gain on your £10,000 investment is much more substantial if you only place £100 down in the first place.
This effect of course cuts both ways. Losses will be intensified should trading strategies go horribly wrong. In this sense, the availability of gearing can be both an advantage and a disadvantage of spread betting. It is likewise possible to manage risks by employing stop-loss positions and an array of trading strategies in order to prevent losses getting out of hand. Still investors must be weary with the actual use of spread betting.
Just like financial trading, the key is to understand the risk and the potential losses should the trade awfully goes bad. Getting the right risk management correctly can lead to the full advantages of spread betting.
Tax advantages that might help deter the cost
There is indeed no doubt that the more advantageous tax treatment of spread betting is very crucial, yet how valuable will be dependent on the success of the trades. First there is the question of stamp duty, this is payable upon purchases of many financial assets including most shares which at any rate of 0.5 %, so the purchase of £10,000 of British Telecom shares, for example, will cost you £50.
No stamp duty shall be payable with spread betting. The larger the savings the potential comes after a profitable trade. Investors are entitled to make a certain amount of profit tax-free each year but the capital gains tax shall be made payable above the £11,000 limits which is normally at a rate of 28 %.
Spread betting profits on the other hand are tax free. Hence a £20,000 profit on a conventional stock market investment this year traders will potentially have a CGT liability of £2,520. Basically, the same profit on the same investment via spread betting does not generally attach taxes.