What are the advantages of spread trading?
Historically many investors were happy to adopt a buy and hold strategy for stocks and shares with a view to benefitting from gradual price appreciation, dividends, etc.
In recent times, people are realising that taking more active views about the markets and using newer, powerful tools like financial spread trading gives them great opportunities to make money in a wider range of instruments in both bull and bear markets.
The benefits of spread trading (another term for spread betting) include:
– Cost efficient
Spread Trading is an instant, cheap, simple and easy way to trade thousands of financial instruments like stocks, indices, currencies and commodities. When you spread trade the only cost involved in each trade is the spread itself. That’s why it is important to check the spreads the various spread trading companies offer before you decide who to open an account with. No Broker Fees, No Commission, No Annual Charges. Once you do open a spread trading account there are no annual account charges as is the case with many traditional brokers who can charge up to £100 per year to use their online trading platform.
– Go long or short
You can make money in both falling and rising markets. One of the unique benefits of spread trading is that you can go Short as well as Long. This allows you to bet on a share’s price falling and if you are correct in your prediction make money from that trade. Given the turmoil we have seen in the global financial markets over the last 18 months, with many shares losing up to 90% of their value and pension funds across the world seeing massive falls in their value, having the option to short shares has never being more important.
– No capital gains tax
You are trading your view on the direction you think a price is going and you don’t own the underlying asset. Therefore gains are tax free. This is because with spread trading you are placing a bet rather than buying a share. As a result, because you never take ownership of the share or asset, you have no capital gains tax liability. This saves you 25% straight away over buying shares through a broker.
– No currency risk or foreign exchange exposure
When trading international stocks you’re not worried about currency fluctuations as you are betting on a per point movement basis in your currency of choice. Most spread trading companies allow you to have your account in a single currency (e.g. Euro / GBP). This means your trading funds, the stakes you put on your trades and all profits or losses are in your selected currency. This removes the risk of currency fluctuations impacting the profits (or losses) you make on your trades. It also simplifies your trades and the management of your account as you always know where you stand and don’t have to try account for currency swings.
– Transparent
You see the exact price on offer for any trade – whether large or small, there’s no waiting for your broker to get back to you.
– Trade in small sizes
You can trade from as little as 20 pence per point stakes* (or currency equivalent). *Some exceptions including small cap equities.
– Low initial outlay
Spread trading is a leveraged investment which means it allows you to open a trade by only putting up a fraction of the total value of the trade. Most spread trading companies use what is referred to as the IMR (Initial Margin Requirement) when calculating amount of money you need to have in your account to open a trade. This IMR varies between the different spread trading companies but is typically somewhere between 2% and 20% depending on the trade you are opening. This means that if for example you wanted to open a trade on CRH at 1700 and the IMR was 15%, you would only need to have €255 in your account for every €1 stake you want to trade. While there are definite benefits in that you can start spread trading without needing to have a lot of cash in your account it is important to remember that leveraged trading also carries additional risk. While the rewards are magnified due to the leveraged nature of your trades, so too are any losses if a trade goes against you. See our risks section for further information.
– No stamp duty
Better still you have no Income Tax liability and there is no Stamp Duty to be paid on your trades.
– Trade in your own time
You can do the day job and still be a successful spread trader. The markets are open early and close late. You can also set automatic buy or sell orders at price levels of your choice.
– Easy to manage risk
You decide on your acceptable level of risk and set your own stop loss order levels on any given position.
– Funds are liquid
You can withdraw your funds at any time without delay.
– Education
Spread trading is a great way to further your financial education. You’ll have thousands of prices and up-to-the-instant charting information at your fingertips.
– Hedging
If you have an asset such as stock options or overseas property / stock portfolio or a business related FX exposure, you can lock in value cost-effectively through financial spread betting.
– Wide range of markets
Spread betting offers you the chance to trade all sorts of markets, not just individual shares as is the case with traditional brokers. You can also trade the currency markets, oil, gold, interest rates and bonds to name but a few.
