Posted by MJTM | Posted in Financial | Posted on 06-05-2016
Put simply, a financial spread bet allows you to speculate on rises and falls in the financial markets. You can profit, or incur losses, for each point change matching the direction you predict the markets will move in.
Financial spread betting offers a number of benefits that traditional trading can’t provide, like not having to own the underlying asset which you’re trading (e.g. a share in Apple). You can place financial spread bets on thousands of global shares, indices, bonds and securities without ever having to deal directly with the markets.
What is spread?
As a trader on any derivatives market you are offered two prices either side of the underlying market price: the buy price and the sell price. The difference between these two prices is known as the spread.
For example, the underlying market price for the UK100 index is at 6500 points. Currently the bid price for this market is 6499.6 and the offer price is 6500.4. The difference between the bid and offer (6500.4 – 6499.6 = 0.8) is known as the spread.
The size of a spread is important because it is essentially the amount you are charged for every trade you make, there is no commission charged in spread betting. The tighter a spread is reflects how quickly you can start to realise profits, or losses, from the market you are trading.
How does a financial spread bet work?
A financial spread bet comes down to you predicting whether the market you are trading will rise or fall. If you are going long in the belief a market will rise, your bet will open at the offer price. Your profits will increase with each point rise above the level you entered the trade.
If you believe the markets will fall and choose to go short, your bet will open at the bid price. Assuming the markets behave as you predicted, your profits will increase with each point the market falls below the price you entered the trade.
Using the UK100 example above, you speculate the UK100 will rise and go long (open a buy position) with a stake of £10 at 6500.4. As you predicted, UK100 rises 10 points to a bid/offer of 6509.6-6510.4. At this point you decide to close your position and sell at the bid price of 9509.6. Because you bought at 6500.4, you have increased your position by 9.2 points. 9.2 points multiplied by your stake of £10 gives you a tax-free profit of £92.
You will incur losses in line with each point change in the event that the markets move in the opposite direction to your position.
What are the benefits of financial spread betting?
- Tax-free: Any profits you make from spread betting are exempt from UK Capital Gains Tax and UK Stamp Duty. This may be dependent on personal circumstances and tax laws may change.
- Leveraged: One of the key benefits of a financial spread bet over traditional trading is that it is a leveraged product. This means that you only have to deposit a percentage, or margin, of the total notional value of your bet. This margin requirement is typically between 0.5% and 4% of the potential value of your trade. Leverage can also work against you if the trade does not work out as expected so you need to understand this risk carefully.
- Go long or go short: By taking a sell position, you can profit from a fall in the value of a market. Unlike traditional trading, you can always stand to profit no matter which way the markets are moving.
Risk Warning: Spread bets and CFD trades are leveraged products. Losses may exceed deposits.