A Financial Spread Bet is an agreement between a customer and
a provider to exchange the difference between the opening and
closing value of the bet. With Financial Spread Betting, you are
simply speculating on the direction of the future price movements
in an underlying instrument; you specify an amount you want to bet
on each point movement. Your profit or loss is simply the
difference between the opening price and closing price of your bet
multiplied by your stake.
Financial Spread Betting offers a tax-free* alternative to
trading on underlying financial instruments such as equities and
index markets. Financial Spread Betting is a versatile tool that
can help you to profit from both upward and downward movements in
prices (although you can make losses).
Financial Spread Bets are a margined product. You only
deposit a fraction of the overall value of the trade (typically
10%). Financial Spread Betting therefore allows you to take a much
larger position than if you were buying the full-value instrument.
However, losses are magnified in exactly the same way.
In addition to the Margin Requirement to establish a
position, if your position moves against you, you may need to make
further deposits. This is because you must meet the full value of
running losses as well as maintaining the Margin Requirement.
It is important to understand that you can make or lose much more
than your initial deposit, unless you bet within a Limited Risk
Account or separately use a Guaranteed Stop Loss order.
Bets are generally made in Pounds Sterling (in £ per point)
even if you bet in non-sterling products. Bet sizes can vary from
small to very large although in order to hedge larger bets, there
may be a delay while we work the order in the relevant
market.
* Financial Spread Betting is currently free of UK Capital
Gains Tax and UK Stamp Duty. Tax laws can of course change.
Why Financial Spread Betting?
There is no great mystery why there are now an estimated
100,000 individuals who are using Financial Spread Betting in the
UK. Financial Spread Betting is quick, flexible and easy to
use
Tax advantages
For UK taxpayers, Financial Spread Bets have the advantage
that profits and losses are currently not subject to the UK Capital
Gains Tax regime, meaning profits are not taxable and losses cannot
be offset.
As Financial Spread Bets do not confer ownership rights, bets
on UK shares are currently not subject to UK Stamp Duty. Financial
Spread Bets therefore save the current 0.5% charge levied on share
purchases. Please note that tax laws can of course
change.
Leverage
Financial Spread Bets are a leveraged product, which means
that the initial deposit to place a bet is only a fraction of the
value of the total position. This leverage gives investors the
potential to make greater profits (or losses) from the same initial
investment. The initial deposit or margin required to open a
Financial Spread Bet is in effect a down-payment on any potential
loss which the customer may incur. Of course, losses may exceed
this amount and the customer would also be liable for any
additional losses. On closure of a bet, the deposit is returned,
leaving the crystallised profit or loss.
Flexibility
- Access to a wide range of financial instruments from a single
account.
- Instant execution in standard size or below as we make firm
prices. (Larger orders may be delayed as we may hedge the position
in the underlying instrument).
- No ownership of the instrument, just access to the price
performance and as a result there is currently no liability to UK
Stamp Duty. UK tax laws may change.
- All bets are in Pounds Sterling which means you avoid any
foreign exchange exposure.
- Online and telephone dealing so that you can deal how and when
you want to.
Hedge your bets
You can use Financial Spread Betting to reduce the risk of
unexpected market movements on the value of your equity
portfolio. For example, you may have a long term share
portfolio that you know you want to keep hold of, but you are
worried that it may lose value in the short term because you think
the markets are heading down. You can take out a Financial Spread
Bet that will help mitigate any short term loss, but at the same
time might assist you to make a long term gain.
Cost advantages
Financial Spread Betting can be a cost effective way of
increasing your profit potential. Please see the example below
which compares the cost of an equity trade and a spread bet.
Please note that whereas there are many advantages of
Financial Spread Betting there are also risks. Since Financial
Spread Betting is a leveraged product, you can lose more than your
initial deposit. You should therefore ensure that you are aware of
all the risks as this product is not suitable for everyone.
Comparison of Share Buying and Spread Betting for 20,000
shares in XYZ plc
Opening Trade
| |
Share Trade |
Spread Bet |
| Value of 20,000 shares |
£14,000.00
XYZ at 70p
|
Buy £200/point XYZ
Rolling at 70.11
|
| Stamp Duty |
£70 |
£0 |
| Commission |
£20 |
£0 |
|
Initial investment
(Total amount required (10% Margin Requirement*)
to place trade/bet)
|
£14,090.00 |
£1,402.20 |
| Financing (LIBOR +2.5%)* |
£0 |
£2.69 per night |
* ((£200x 70.11) x 7%) / 365
Closing Trade
| |
Share Trade |
Spread Bet |
| Sell 20,000 shares |
£15,800.00
XYZ at 79p
|
Sell £200/point XYZ
(78.88 – 70.11 x 200)
|
| Profit on trade |
£1,710.00 |
£1,754.00 |
| Stamp Duty |
£70 |
£0 |
| Commission |
£20 |
£0 |
| Financing |
£0 |
£53.80 (£2.69 x 20 days) |
| Overall profit on trade |
£1,690.00 |
£1,700.20 |
The return on the initial investment from trading conventional
shares is 12.07%. This can be compared to the return of 121.25%
using Financial Spread Betting. However, losses could be magnified
in exactly the same way.
* Customers who hold open positions could become liable to pay
margin.
