The Advantages and Disadvantages of Spread Betting in the UK - dummies

The Advantages and Disadvantages of Spread Betting in the UK

By David Stevenson

Today, spread betting is the biggest and most common form of financial betting in the UK. Quite simply, you bet on a financial market with a spread of prices and returns based on the likely direction of that market.

Taking advantage of spread-betting benefits

The huge rise in popularity of spread betting — especially in the UK where a number of successful companies boast tens of thousands of loyal customers — is a direct consequence of its flexibility. The advantages of spread betting include:

  • Tax-free profits.

  • No commissions or stamp duty.

  • Trading with smaller amounts of money, which can be great for beginner investors.

  • Instant access to a huge range of markets.

  • Ability to go short easily.

  • Excellent technology and Internet support.

  • Unique markets, such as on property, and binary bets, which are similar to fixed odds bets, in which you know exactly what you stand to gain or lose when you place the bet. In binary bets, you wager on whether the asset (or index) will close higher or lower than the current spot price by the end of the day.

  • Leverage, which is useful if you know what you’re doing!

  • No stockbroker commission.

Remembering the disadvantages of spread betting

Just in case you think that spread betting sounds too good to be true . . . you may be right! Spread betting is for certain investors only, and most people are advised to steer well clear of it. First and foremost spread betting is incredibly risky and for tactical, short-term investors who think they know the likely direction of a stock market on a day-to-day basis.

Most statistics coming out of major spread-betting companies suggest that the vast majority of spread bets lose investors money, which helps explain why companies such as IG Index have become so incredibly successful, boasting many tens of thousands of investors actively trading, many on a daily basis, wracking up dealing charges as they take bets on the direction of the financial markets.

The specific risks to look out for include:

  • Unlimited losses: Therefore ensure you make use of stop losses and other risk-control measures.

  • Wide bid-offer spreads: Spread-bet brokers make their money from the spread; the bid-offer prices quoted are often wider than if trading the cash product.

  • Credit offered: If you have a good credit rating, spread betters offer credit accounts. Avoid like the plague!