Article: Introduction to Financial Spread Betting

Financial spread betting is an alternative yet attractive method of trading financial markets. Although it has been very much a British trading activity since the 1980s, spread betting - or "spread bet trading" as it is also known - is actually available to virtually anyone worldwide.

Spread betting, as the term rightly implies, is a form of "betting" or "gambling". Although this fact may give the impression that "spread betting" is a down-market, poorly regulated relation to the more established methods of trading financial products, spread betting is in fact a highly regulated (by the FSA) professional activity in the UK and offers individuals and companies an alternative means to make a great deal of money in the financial market. What is more, the profits from spread betting are completely tax-free for UK citizens, as well as for citizens in some other countries.

As the term implies, spread betting is speculating about the outcome of some future event, and financial spread betting is specifically concerned about betting (or "trading") on the expected future price of a financial instrument – in our case it is a currency pair.  You are essentially betting (ie, trading) on where you believe the underlying price of a financial instrument (eg the GBPUSD) is likely to go over a defined period of time. It is worth pointing out that unlike traditional betting, for example on a horse race where the outcome is a simple win or lose scenario, with spread betting you are rewarded based on the accuracy of the outcome of the bet - the more accurate you are with your prediction the greater the reward.

The key characteristics of spread betting

Spread betting is tax free
In the UK, where spread betting is predominantly based, all profits generated through spread bet trading are tax free for UK residents. At the time of writing it is also the case with some other countries like Sweden. This means there are no capital or income taxes payable. This can be a double-edged sword as any realised trading losses are not tax deductible.  The tax position of trading gains made via spread betting for traders who are not UK residents is likely to be different, so non-UK spread betting traders should contact the tax authorities in their own respective country to clarify how spread betting gains are dealt with for tax purposes.

Spread betting is a margined product
Spread betting is a margined product - just like normal Forex trading - meaning that a position can be taken with only a fraction of its full value required as the initial deposit. The result of which is that the same very large profits can be made from a relatively small initial stake.  In order to place a trade, an initial deposit called "initial margin requirement" (IMR) needs to be paid.  This margin payment can be as small as 1/10th or even 1/100th of the full value of what is being purchased.  Margin trading therefore allows a trader to take a much larger position than would otherwise be taken with the amount of the initial stake, which can result in much greater profits than would otherwise be achievable. Conversely, it could also mean much greater losses than would otherwise be incurred.

Spread betting is (almost) fee free
With spread betting there are no broker commissions or stamp duty (UK) fees to pay.  Although there are no direct fees payable, spread betting companies, or firms, make their profits from the spread offered, which in most cases nowadays is similar to the spread size on the underlying financial product being traded.  However, it is worth pointing out that if a spread bet trade is held overnight there is usually a small overnight financing charge payable.

Spread betting is possible on a vast range of financial products
The majority of spread bet trades are taken on equities (stocks), but because the range of financial products that can be traded via spread trading has greatly increased in the last few years the percentage of equity (or stock) spread bets have decreased relative to other spread trades placed.  Other popular spread bet trading products now include Forex (both Spot Forex and Forex Futures); global stock indices, eg, DAX 30 index, FTSE100 index, NASDAQ index, the Dow Jones; individual financial stock sectors, eg, Banks, Telecoms, Pharmaceuticals; individual global stocks, eg, individual companies on the S&P500 or FTSE 250; futures and options; commodities and even interest rate futures.  It is also possible to spread bet on the value of house prices!

Trade on International Financial Markets with No Currency Exchange Risk
When you place a spread bet trade on any financial instrument for example on stock listed on a foreign stock exchange, you will place a bet, or trade, using the base currency of your chosen trading account (£, $, or €) held with your spread betting company. The whole of the trade will be handled or processed in your chosen currency thereby removing any potential currency risk.

Forex Trading Example
Up until now I have been fairly general in my description of what spread betting actually is, since this Website article is based on another article that I wrote earlier this year. However, as you are interested in trading Forex with the Lindencourt FX System, lets just look at a simple example of how we would trade Forex via spread betting.  You will see that it is not rocket science.  In fact it is very much like trading Forex in the usual way, but even simpler -  even I can do it.

Quite simply all you do is "bet" or trade an amount per pip in one or other direction from the immediate spread.  For example, the EURUSD Is currently quoted at 14789-91 (the spread is virtually the same as with your usual forex broker, in some cases it is even more competitive with spreads of 1 pip or less on the majors). You decide to SELL at $50 per point @ 14789.  After 2 hours the price has fallen to 14767-69 and you decide to close out the position.  To close out your position you need to BUY $50 @ 14769.
Price to Open Trade        14789
Price to Close Trade       14769
Gain                                         +20 pips

The difference is +20 pips so your profit is +20 pips x $50 = $1,000 profit. 

NB. one of the benefits of spread betting is that it would not make any difference if you traded in €, $ or £ the profit would be 20 pips x your chosen currency.  So if you undertook this trade using your Euro-based trading account, your profit would be 20 points x €50 = €1,000.  Likewise if you traded with a Sterling-based trading account, your profit would be 20 points x £50 = £1,000.  There are no exchange differences unlike with standard forex trading. So put your pip calculator away as it is not needed with spread betting.
In the above example if the price moved against you to, say 14797-99 and you decided to close out the trade, your loss would be as follows:
Price to Open Trade        14789
Price to Close Trade       14799
Loss                                        +10 pips
The difference is -10 pips so your loss is -10 pips x $50 = $500 loss. 

This has been a brief introduction to spread betting to those who know little or nothing about it. I hope this provides you with a useful introduction to this great alternative to trading Forex in the usual way.  If you are a UK citizen, I strongly advise you to trade forex with the Lindencourt FX system using spread betting, not least because of the tax advantage afforded to you.

I mainly trade with spread betting and my recommended spread betting companies are listed on the right hand side of this web page.

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