Spread Betting | Benefits | Risks

Spread betting appeals to a wide variety of individuals who want to take advantage of the versatility and great value that spread betting can offer. You do not need to be an experienced investor to spread bet, but you do need to research the products that you wish to trade and be aware of the risks associated with spread betting .

The Benefits

The following reasons explain why spread betting might appeal to you:

Tax Free Profits**

Any capital gains you make from financial spread betting are completely free of Capital Gains and Income tax (for UK residents).

No Stamp Duty**

Financial spread betting is exempt from UK stamp duty.

Bull or Bear

One of the most obvious advantages of spread betting is the opportunity to short (or sell) the market. You can therefore profit from both rising and falling markets.

Hedging

Many investors use spread betting to hedge their existing share portfolio. For example, if you have some shares which are decreasing in value in the short-term, you could “Sell” the value of the share using a sell bet with Capital Spreads and possibly make a profit to counter-balance the decreasing value of your shares.

Stake Size of Your Choice

Spread betting also allows you to trade in sizes smaller than those usually available in the underlying market.

Trade in One Currency

On the Capital Spreads trading platform you can trade on a huge variety of financial products in one place and in one currency. We currently offer 9 currency accounts which means you can avoid costly exchange rates and can, in general, trade in your own currency.

Trade on Margin

Spread bets are margined trading products, which means you need only deposit a small percentage of the full value of your trade leaving your excess capital to continue working hard elsewhere. For example, a £1 bet on a share is the equivalent of buying (or selling) 100 real shares. On most shares our minimum Initial Margin Requirement (deposit) is 3-5% of the underlying value of the shares which means that you can make a bet in a share with as little as 1/30th of the money required to buy the actual real shares from a stock broker.

No Commission or Fees

As Capital Spreads is not a stockbroker, we do not charge commission or fees. We make our profit from the spread we add to the underlying market prices, which result in our quotes. Plus, don’t forget, that UK residents benefit further because your profits do not incur Capital Gains and Income Tax.

Alternative to Traditional Stock Broking

The table below illustrates how a share investment held for 30 days might compare to if it was done as a spread bet.

Traditional Stock Broker
ROCE working: 4750 ÷ 14000 x 100%
Buy 10,000 shares @	140p
Cash outlay	(£14,000)
Sell 10,000 shares @	200p
Gross profit	£6,000
Stamp duty	(£70)
Commission (buy/sell)	(£100)
Tax @ 18%	(£1,080)
Overnight financing	£0
Net Profit	£4,750
Return on Capital Employed	34%

Capital Spreads
ROCE working: 5890 ÷ 1401 x 100%
Buy £100 per point @	140.1p
Cash outlay*	(£1,401)
Sell £100 per point @	199.9p
Gross profit	£5,980
Stamp duty	£0
Commission (buy/sell)	£0
Tax**	£0
Overnight financing	(£90)
Net Profit	£5890
Return on Capital Employed	420%

* This is using the “Max CGSL” for most shares which is 10% (the “Min IMR” is 3%). NB you can lose more than this deposit.
** Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

Remember that the risk is still the same for either scenario. For example, if the company you were trading on was to go bust and its share price plummeted to 0p overnight, then you would still be liable to a £14,010 loss with Capital Spreads and not just the 10% deposit of £1,401. The other benefit of doing this trade as a spread bet is that you’ve freed up almost £12,600 of spare capital to use elsewhere or remain in the bank earning interest (which could go some way to paying for the overnight financing).

As with all spread bets you do not own or owe the underlying asset. So, if you open a buy spread bet on a share you will not have any voting rights.

Regulated Industry

Financial spread betting is an industry which is tightly regulated by the Financial Services Authority (FSA). Our regulation by the FSA means that we have to abide by strict rules and regulations which ultimately mean you have the comfort of knowing that you are working with a reputable organisation.

The Risks

Whilst spread betting offers many benefits, it is important to note that it carries a high level of risk to your capital, and you can lose more than your initial deposit. Capital Spreads have a mandatory stop loss policy whereby a stop loss is assigned to each and every trade that you open. You can choose to place the stop loss when you open the position but if you don't, the computer will automatically assign a stop loss for you. However please note that these stops are not guaranteed, so in the event of market gapping these orders will be filled at the next best available price. If you prefer to have your stop loss price guaranteed, you can place a Guaranteed Stop Order at a small premium. For more information please refer to the Market Information Sheet.

There are a number of other risks that you should consider prior to spread betting:

Leverage risk

The leveraged nature of spread betting means that a relatively small move in the price of the underlying instrument of a trade can cause an immediate and substantial loss to you, including a loss far greater than the amount of your initial investment.

Stop Loss Risk

As mentioned above, Capital Spreads have a policy that requires a mandatory "stop loss" on every open position placed on the platform. Subject to holding sufficient funds in your account, you can alter the level of this stop loss to suit your trading strategy but the stop loss cannot be deleted. This means that if you do not have the required funds in your account to move this stop loss or if the level of the stop loss is breached prior to you moving this stop loss, then the position in question will be closed out, which may pose a risk to your trading strategy. The mandatory stop loss is not guaranteed (see Gapping Risk below). Consequently, you can lose more than your initial investment. You can opt for a Guaranteed Stop Order for a small premium on the platform which guarantees that your stop loss will not be subject to gapping.

Gapping Risk

Gapping refers to an occurrence whereby the market moves from one price directly to another significantly different price. There can be many reasons for gapping: economic figures; company announcements; political events; natural disasters etc. When this happens an order will be executed at the Capital Spreads quote based upon the first price that Capital Spreads is reasonably able to obtain on the underlying market. We offer Guaranteed Stop Orders which eliminate gapping risk as your maximum losses are then limited to your chosen stop level. Please note a small premium is charged at the time of placing the Guaranteed Stop Orders and is not refundable if it expires or is cancelled.

Example of gapping

You have a long position on Barclays Rolling Daily, having bought 1000 points at 20.32 with a stop loss set at 19.32. The price of Barclays Rolling Daily, dropped through the 19.32 level on the back of a profits warning. The first price that Capital Spreads can reasonably offer after the announcement of the profits warning is 19.07-19.10. Rather than your position being closed at your stop loss level of 19.32 it is closed at 19.07, meaning that due to gapping you have incurred a loss which is £250 more than the loss you would have otherwise suffered had your position been closed at 19.32.