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Shares Spread Betting |
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During the last few years spread betting has become an increasingly popular way of trading various markets, including shares, currencies, commodities and bonds.
Shares Spread Betting - Shares and Stock Markets
Shares spread betting in particular has become very popular. It provides investors with a way of speculating on shares without actually buying the shares.
With this form of trading, investors speculate on whether the price of a particular share will go up or down.
You can also speculate on whole stock market indices such as the FTSE 100, Dow Jones and DAX 30. These tend to be the most popular spread betting markets, for more details see spread betting on indices.
Shares Spread Betting - Leverage
There are a couple of crucial differences with spread betting on shares compared to trading traditional stocks and shares. As mentioned above, a key difference is that you can speculate on a market to fall. Another key difference is leverage.
If you have £500 in an ordinary share trading account with a broker, you can only trade shares to the value of £500. However, given that spread betting is a leveraged form of trading, you can control of a much larger investment than your deposit.
The leverage with shares is normally around 100:1, which means that with a £500 deposit you can have a trade with worth £50,000.
Let’s say you buy the Barclays spread betting market and the Barclays share price increases by 1% then your profit would be 1% of £50,000 = £500, in other words, you would have doubled your initial deposit.
In layman’s terms, the leverage magnifies your profits. However it also magnifies your losses.
So should the Barclays share price drop by 0.5% then your loss would be 0.5% of £50,000 = £250, ie you would lose half of your deposit even though the shares only moved 0.5%.
For a fully worked example see: How to Spread Bet on Shares.
Shares Spread Betting - Risk Management
Fortunately, there is a way to limit your risks: a guaranteed stop loss.
If you add a guaranteed stop loss to your trade then your trade will be closed if the market moves against your position and passes the level of your guaranteed stop loss.
Guaranteed stop losses need thought though. If you set a guaranteed stop loss that is too close to your trade then even if the market makes the slightest movement in the wrong direction your trade will be closed. Numerous small losses like this can quickly eat up your profits.
If you set your guaranteed stop loss too far from your trade then you expose yourself to a higher risk.
Nevertheless whilst adding a guaranteed stop loss to your trade normally comes with a small fee, only your losses are limited. A guaranteed stop loss doesn’t put a limit on your profits.
Costs with Shares Spread Betting
If you open and close a trade on the same day, your only cost will be the spread, ie the difference between the buying and selling price of the instrument.
If you keep a ‘long’ trade open overnight, the spread betting company will charge you an overnight financing fee. On a daily basis this fee is small, however it can make a significant difference if you plan on longer term trading.
With ‘short’ trades, ie trades where you have bet on the market to go down, your account will normally see a small credit when you keep your trades open overnight.
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| FTSE 100 shares (spread size) |
0.10% |
0.10% |
0.10% |
0.10% |
0.16% |
0.10% |
0.10% |
| FTSE 100 shares (min stake) |
£1 |
£1 |
£1 |
£1 |
£0.50 |
£0.50 |
£1 |
| Shares (more available) |
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Shares spread betting may also be available with other companies - notes.
Shares Spread Betting - Tax Free*
As well as being fast and convenient, shares spread betting is also tax free*. There is no capital gains tax, no income tax and no stamp duty.
Shares Spread Betting - Dividends
With shares spread betting, if you’ve bought a market and the share in question goes ‘ex-dividend’ then your spread betting account will usually be credited with a percentage of any dividends declared. This percentage differs between spread betting companies.
If you’ve sold the market and the share goes ‘ex-dividend’ then your account will usually be debited with a percentage of any dividends declared.
Shares Spread Betting
For more on shares spread betting see:
With financial spread betting you can lose more than your original stake or investment. Spread betting carries a high level of risk to your capital. Please familiarise yourself with the risks that are involved and before trading, ensure that financial spread betting matches your investment objectives. Seek independent advice where necessary.
Shares Spread Betting - edited by MJ, 10 May 2012.
For related pages and articles see:
Spread Betting on Shares - guide last updated: 18 May 2012
Spread Betting on Shares - the spread betting guide to trading Shares, including where to spread bet on Shares, how to spread bet on Shares and the best way to ...more: Spread Betting on Shares.
Shares Spread Betting - guide last updated: 10 May 2012
Shares Spread Betting: a guide to shares spread betting reviewing costs, risk management, tax-free* trading, dividends with shares spread betting and ...more: Shares Spread Betting.
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With spread betting you can lose more than your original stake or investment. Spread betting carries a high level of risk to your capital so please familiarise yourself with the risks that are involved and, before trading, ensure that spread betting matches your investment objectives. Seek independent advice where necessary.
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* Based on current UK tax law. Tax law may change and can differ depending on your personal circumstances.
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