Spread Betting Slowly Evolving Towards Mainstream

The advantage of spread betting, as opposed to buying shares, is that it offers one of the simplest ways to bet on markets moving downwards, as they have in recent months. Moreover, bets are free of stamp duty, while any gains are not subject to capital gains tax (CGT).

Most regular readers will be fully aware that the best way to enhance their trading account is to trade with leverage. In days gone by, the only way to leverage an equity position in the UK market was to buy or sell individual share futures or take on a call or put position with options. These days it would seem that the undisputed heavyweight for the trading community are the fantastic derivatives like spread betting and cfds. That is all well and good for short-term traders and spread betting is certainly an instrument that most of us can use to great success with the speculative part of our portfolios, but every individual should have a multi-faceted approach to wealth creation - above and beyond solely trading.

Spread betting is a useful vehicle for the occasional down-bet although I have to admit I am not an advocate of short-selling. I feel that the very high profile loudly shouted aggression with which some 'shorters' hit a completely undeserving share these days is destructive and its effects are sometimes very long-lived, long after the short-sellers have taken their profit and gone. Folk get frightened, and if a stock has just been hit, won't buy for fear it will happen again. In the medium term, a company can be so severely damaged that it can't raise funds other than at fire sale prices, and suffers even more because investors have lost confidence in it.

However, there are situations where a stock gets so far ahead of itself that it's daft. A down-bet can be useful here if you are convinced that the share is about to be re-rated in a downward direction. I have tried it numerous times and in most cases it has worked a treat!

Also, one can use spread bets as a way of adding to an existing long-term holding at a lower cost than buying more shares, rather than betting on short-term stock market movements, let alone ex-divs...

So popular have these products become that they have been estimated to account for more than one third of total trading volumes on the London Stock Exchange. CFDs and spread bets are deals between the client and his or her broker so do not themselves go through the exchange, but the hedge that the dealer puts in place to cover his position does result in an exchange trade.

This shift away from share trading to dealing in derivatives concerns some observers as it takes takes liquidity out of the cash market, particularly for smaller stocks. Gavin Oldham, chief executive of the Share Centre, a retail stockbroker says 'They say it is backed up by the [hedging] business that goes through the stock market but the volumes are netted off.'

At the retail level spread betting is growing faster than CFDs. Anyone who spread bets thinks they are going to win so they don't want to pay the tax and in the UK there is no capital gains tax on spread betting gains. Because you do not hold a contract (share) but bet on the outcome makes it a gamble. Otherwise the procedure is very close to trading via a futures broker. All firms are regulated in the UK (unlike Forex). People that fail at spread betting will most likely fail trading via a conventional futures broker. If you live in the UK and are not into scalping for ticks, then spread betting can be a lot more beneficial due to favourable tax laws, which indeed can change tomorrow, next year, after 10 years, etc.

There has been a move among retail investors over to spread betting from CFDs but few go the other way. Among institutions no-one uses spread bets because the corporate pay tax.