Making Riskier Investments: Betting On Financial Spreads
Spread betting is really gambling rather than investing and is very risky.
You bet on increases or decreases in the price of an individual share (or an index, interest rates, currency movements, commodities, futures and options or property values).
You are quoted the spread (buying and selling price) of a share three and six months ahead and you buy (an up bet) or sell (a down bet) at the appropriate price, depending on whether you are gambling on a rising or falling market.
Your bet will be at so much a point, usually a minimum of £5 (these amounts are called units).
If you get it right, you collect the movement times the price per point but if you get it wrong you pay it.
For example, if the spread on the FTSE 100 index is 6,000 to 6,100, you bet on an increase at £10 a point and the spread goes up 100 points to 6,100 to 6,200, you gain 100 x £10 = £1,000.
However, if it goes down to 5,900 to 6,000, you lose the same amount.
So profits and losses are unlimited, but you can close out at any time (even outside normal stock exchange trading hours, as it is a 24 hour market) in order to lock in your profits or limit your losses.
As it is gambling, no tax is payable on any gain you make but of course any losses cannot be set against any other taxable gains.
Betting tax is included in the spreads, which are wider than on the underlying shares.
Flotations One important area for spread betting is flotations (such as where a new company comes to the market) because usually only institutions can subscribe; private investors must wait till the first day of trading, when the big price increases frequently associated with flotations have already taken place.
In this case, spread betting offers the opportunity to participate, because spread betting companies operate a grey' market based on what they expect will be the first day's closing spread.
Selling short Selling the spread is a suitable substitute for 'selling short' - selling shares you do not have because you expect the price to fall, so that you make a profit when you buy back at the lower price - a process which is difficult in the UK stock market itself.
You can also hedge your investments protect them against a fall in prices without selling the shares.
Instead you sell the spread, for an individual share or for your whole portfolio (by choosing the most appropriate index).
This way you avoid brokerage fees and stamp duty as well as capital gains tax.
Similarly, you can buy spreads to lock in an expected future rise in prices of shares you have had to sell or have not yet got the cash to buy.
It is therefore an alternative to hedging via CFD trading and options, which are taxable and for which you do have to put up cash to buy them.
You bet on increases or decreases in the price of an individual share (or an index, interest rates, currency movements, commodities, futures and options or property values).
You are quoted the spread (buying and selling price) of a share three and six months ahead and you buy (an up bet) or sell (a down bet) at the appropriate price, depending on whether you are gambling on a rising or falling market.
Your bet will be at so much a point, usually a minimum of £5 (these amounts are called units).
If you get it right, you collect the movement times the price per point but if you get it wrong you pay it.
For example, if the spread on the FTSE 100 index is 6,000 to 6,100, you bet on an increase at £10 a point and the spread goes up 100 points to 6,100 to 6,200, you gain 100 x £10 = £1,000.
However, if it goes down to 5,900 to 6,000, you lose the same amount.
So profits and losses are unlimited, but you can close out at any time (even outside normal stock exchange trading hours, as it is a 24 hour market) in order to lock in your profits or limit your losses.
As it is gambling, no tax is payable on any gain you make but of course any losses cannot be set against any other taxable gains.
Betting tax is included in the spreads, which are wider than on the underlying shares.
Flotations One important area for spread betting is flotations (such as where a new company comes to the market) because usually only institutions can subscribe; private investors must wait till the first day of trading, when the big price increases frequently associated with flotations have already taken place.
In this case, spread betting offers the opportunity to participate, because spread betting companies operate a grey' market based on what they expect will be the first day's closing spread.
Selling short Selling the spread is a suitable substitute for 'selling short' - selling shares you do not have because you expect the price to fall, so that you make a profit when you buy back at the lower price - a process which is difficult in the UK stock market itself.
You can also hedge your investments protect them against a fall in prices without selling the shares.
Instead you sell the spread, for an individual share or for your whole portfolio (by choosing the most appropriate index).
This way you avoid brokerage fees and stamp duty as well as capital gains tax.
Similarly, you can buy spreads to lock in an expected future rise in prices of shares you have had to sell or have not yet got the cash to buy.
It is therefore an alternative to hedging via CFD trading and options, which are taxable and for which you do have to put up cash to buy them.
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