Spread Betting Is Worth The Risk For Clued-Up Traders
THE persistent refusal of Chancellor Gordon Brown to make any commitment to reform Stamp Duty Reserve Tax on share transactions - at 0.5 percent the highest in Europe - has played a big part in the remarkable growth in popularity of Contracts for Difference (CFDs) and spread betting.
Because, not like conventional instruments, CFDs (read more about them on http://www.contracts-for-difference.com) and spread bets do not confer ownership of the underlying asset - traders buy or sell the price movement in the underlying equity without ever taking delivery of it - neither is subject to stamp duty. And because spread betting falls within the gaming laws, it’s also exempt from Capital Gains Tax.
One other crucial appeal of spread betting is that, as a margin product, it enables traders to gear up their investments. And because, as a margin product, traders could perhaps lose a multiple of their initial stake, spread betting is recommended for use only by professionals, day traders and experienced investors.
But although there are risks attached to spread betting, there are various tools available - such as guaranteed stop losses - that can assist manage that risk by, for example, inputting to the system parameters to notify traders to specified price movements.
Another reason for the recent growth in the popularity of spread betting can be attributed to the fact that, additionally to speculating on the underlying equity, investors can trade on the numerous indices. Certainly, spread betting enables traders to profit from both up and down movements on a wide variety of financial markets, whether or not indices, individual shares or commodities, like gold or crude oil.
Unlike fixed odds betting, under spread betting traders don’t risk a certain amount per bet, and there is no fixed profit or loss.
That is because the profit and loss on a financial spread bet is definitely open as the trader is betting a stake - usually pounds per point - on the direction of the market.
For example, a trader may expect the FTSE 100 index to rise and so opt to buy it at 2 a point utilizing a spread bet. If the trader bought the FTSE 100 index at 4950, risking 2 a point, after which sold it when it rallied 50 points to 5000, his profit would be 100. But if the index moved lower and the trader hereafter sold his bet at 4925 to take a loss, then he would lose 50.
This is the difference between fixed odds betting and spread betting - a trader’s ultimate profit and loss with spread betting is never known till he liquidates the bet.
Using spread bets, a trader can also bet on a downward market by selling short. If he was bearish towards the FTSE 100, expecting lower prices later on, then he could sell the index short at say the market price of 4950, after which cover this bet or buy it back at 4900. If his stake was 2 a point then his profit would be a tax-free 100.
But when his view is incorrect and the FTSE 100 rises, and so he chooses to take a loss by buying back his down-bet or short trade at 5000, losing 50 points multiplied by his 2 stake represents a 100 loss.
The most important cost in spread betting is the spread - the difference between the bid and the offer price - and this is the primary reason why hedge funds make use of CFDs and not spread bets. The wider the spread, the more a speculator will pay to trade.
Thankfully, however, spreads are getting tighter due to increased competition since investors are starting to realize the advantages of financial spread betting.
Spread betting appeals to similar kind of market as CFDs, specifically experienced traders, active in the market who understand the risks associated with margins and gearing. A lot of spread betting could be short-term trades, volume-based, high volume day traders coming in and out of positions.
Experienced traders all spread bet for the basic reason that if they can make 10,000 from spread betting, then they can keep 10,000 spread betting, instead of handing over a considerable proportion of it to the taxman.
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Tags: Gambling, spread trading
