Market trading

The opportunities and risks of financial spread betting

Spread betting on stocks or other assets ‘on margin’ or ‘with leverage’ will amplify both your gains and losses, but despite the risks the practice has become increasingly popular with retails investors in recent years.

What is spread betting?

Financial spread betting is a way for people to speculate on financial markets without owning any assets, with a spread bet in many ways similar to a derivative contract for difference (CFD). Indeed, many trading companies offer both spread bets and CFDs in parallel on the same digital platform – with the main difference between the two choices being how they are taxed and that spread bets have a set expiry date whilst CFDs do not.

Both spread bets and CFDs are considered “leveraged derivatives”, which means you have full market exposure for your position despite only needing to put down an initial deposit. This can help to maximise profits, but can also accelerate potential losses and so it is critical for investors to understand the risks before choosing either financial instrument.

How does leverage work?

The amount of leverage you are offered by a platform depends on a number of factors ranging from how risky an asset is to the size of your position. The Financial Conduct Authority (FCA), which regulates financial markets in the UK, has imposed a number of rules on the amount of leverage that can be offered to retail traders like those that use the various trading apps and platforms. Different brokers may offer different amounts of leverage, but they are all limited to work within the same FCA rules.

Is spread betting gambling?

Spread betting may feel quite different to a game of poker or roulette, but it is still gambling and you should be aware of the high risk of losing money rapidly due leverage. However, the good news is that because it is considered gambling any profits you make are considered gambling winnings by HMRC and unlike CFDs or other investments in stocks and shares are not subject to capital gains tax or stamp duty.

The benefit of tax-free profits has made spread betting popular in recent years, but at the same time any losses cannot be offset against future earnings for tax calculations.

What are the costs of financial spread betting?

As noted above, spread betting is considered gambling by UK tax authorities and as such any gains are tax, but there are costs involved in the transactions and trades. In general you will pay the spread charged by the broker, which is the difference between the buying and selling price of the asset. And if you hold the position overnight, you will be charged a funding charge, which is effectively the interest rate for the leveraged position, but these rates do vary between trading platforms.

What markets can you place spread bets on?

In theory it is possible to make a spread bet on almost any market, but in reality the markets are limited by the trading platforms and so the best spread betting platform to choose is the one that covers the markets you are most interested in. Nonetheless, many of the leading platforms offer options on thousands of different markets from stocks and shares around the world, to currencies, commodities, and many more. If you would like to place a bet on the price of steel or movements of Sterling against the Euro, then platforms like IG, Capital, Pepperstone, and ETX could all be good options.