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Financial spread betting is a flexible form of derivatives trading which allows investors to speculate on whether the value of an instrument will rise or fall, without taking ownership of the underlying asset. Profits made from financial spread betting are tax-free* and exempt from stamp duty.
How Spread Betting Works
Financial spread betting works slightly differently to other forms of online trading. Instead of buying or selling lots of currency or a number of shares, traders invest in a specific amount of the instrument they are trading. This is known as a ‘stake’. To calculate profit and loss, investors must multiply their stake by how much the market moved in any given direction.
When financial spread betting, an investor will first select the instrument they wish to trade and decide whether they think its value will rise or fall. Then, they will choose the size of their stake, in other words, how much capital they are willing to invest per point of movement in the market. After employing sound risk management, an investor will then place their trade.
Spread Betting Example #1 – Going Long (Buy)
An investor decides to spread bet on the GBP/USD currency pair, which is trading at a buy price of 1.32900 and a sell price of 1.32880. Setting a stake of £10 per point of movement, the investor opens a long position on the pair.
GBP/USD then rises to a sell price of 1.32950 and the trader closes the position to lock in the profit earned. As this is financial spread betting, the profit from this trade would then be calculated by multiplying the difference between the opening buy price and the closing sell price (1.32950 – 1.32900 = 0.0005) by the stake (£10). So, the total profit earned from this trade would be £50.
Spread Betting Example #2 – Going Short (Sell)
In this spread betting example, an investor decides to spread bet on the shares of Facebook, which are trading at a sell price of 187.620 and a buy price of 187.710. Believing the price of Facebook shares will fall, the investor sets a stake of £5 and opens a short position.
Unfortunately, the market moves against the investor on this occasion. The buy price rises to 187.820 and the investor closes their position. The loss from this trade would be calculated by multiplying the difference closing buy price and the opening sell price (187.820 – 187.620 = 0.2) by the stake (£5). The total loss on this trade would be £100.
Financial Spread Betting vs CFD Trading
Both financial spread betting and CFD trading are forms of leveraged derivatives trading that allow investors to speculate on the value of instruments from a range of global markets, without taking ownership of the underlying assets. The main features of each can be seen in the table below:
| Financial Spread Betting | CFD Trading | |
|---|---|---|
| How it Works | Trade a monetary amount (stake in £) per point of price movement | Trade lots of currencies and commodities or a number of shares |
| Profit & Loss Calculation | Multiply stake by how many points the market moves | Multiply position size by number of pips lost or gained |
| Leverage | Yes | Yes |
| Tax-Free Profits* | Yes | No |
| Exempt from Stamp Duty | Yes | Yes |
| Go Long & Go Short | Yes | Yes |
| Trade 24/5 | Yes | Yes |
| Risk Management (S/L & T/P) | Yes | Yes |
Who is Financial Spread Betting Suitable For?
Financial spread betting is a leveraged product and can potentially be a profitable method of investment, although it does include a certain amount of risk. As such, it may be more suitable for investors who:
- Have a certain level of experience in the financial markets
- Are interested in tax-free* profits that are exempt from stamp duty
- May be looking to diversify their portfolios
- Are more interested in short-term market opportunities
Why spread bet with LCG
*Tax laws depend on individual circumstances