Like any financial product, spread betting has pros and cons that you may be unaware of. On this page, I’ll share the advantages and disadvantages of using spread betting.
Key Takeaways:
- Spread betting is tax-efficient for UK traders, as it’s exempt from capital gains and stamp duty tax due to its classification as gambling by the HMRC.
- It allows leverage, enabling traders to control larger bet sizes with a smaller capital outlay while also amplifying potential profits and losses.
- Unlike traditional investing, traders can profit from rising and falling markets, offering flexibility and opportunities in various market conditions.
- Spread betting offers access to a wide range of markets (forex, indices, stocks, commodities, bonds) with lower trading fees than traditional financial products.
What Are The Advantages Of Spread Betting
Let’s first go over the core advantages of having a spread bet compared to other financial products like forex or CFD trading. I have split this into the eight main benefits for UK traders.
1. Your Profits Are Exempt From Capital Gains And Stamp Duty Tax
The highlight feature of spread betting is that it is exempt from capital gains tax as the HMRC deems this trading activity as gambling (although the FCA regulates it). It is also exempt from stamp duty tax as it is a market derivative (which means you don’t own the underlying asset), further helping you reduce your trading fees.
2. You Can Use Leverage To Control Larger Bet Sizes
Leverage is built into spread betting, and it can significantly amplify your profits (and losses) through smaller market movements. When you use leverage, you borrow capital to increase the size of your bet, giving control over a much larger position than you’d generally be able to afford.
For example, if you are betting on a currency pair like EUR/USD, it has a maximum leverage of 1:30, meaning for every £1 you deposit in the margin (collateral against the bet), the broker will “loan” you £30.
3. Bet On Rising And Falling Markets
As I mentioned, spread betting is a derivative of an underlying market, so you can profit when the asset rises and falls, giving you opportunities to bet in any market condition, unlike traditional methods like purchasing stocks, where you can only benefit from the rising stock price.
This adds a new dynamic to your trading as you can now benefit from your analysis when you think a company or asset is doing poorly. Being able to spread bet on both long (buy) and short (selling) markets also allows you to hedge your shares portfolio and protect your stocks in a falling market (with tax-free profits, too).
4. You Can Spread Bet On A Range Of Markets
Spread betting is available across diverse markets, meaning you’re not limited to one type of asset. If you’re interested in forex, indices, stocks, commodities, and even bonds, you can find markets to bet on with spread betting. Some brokers like IG Group have an extensive selection of markets, allowing you to spread bet on options and futures markets.
With leverage involved, most spread bettors enjoy the liquidity and volatility offered by the forex markets, as you can day trade these markets with relative ease and low trading costs.
5. Lower Trading Fees Compared To Traditional Methods
Unlike other financial products, spread betting brokers typically use a “spread-only” pricing model (similar to the Standard Accounts with CFD brokers), where you will only pay a spread. This means you will not pay any commission on your spread bets, and the spreads the brokers offer are generally low (especially when compared to CFD standard account spreads).
As mentioned, spread betting is exempt from stamp duty and capital gains tax, whereas traditional investing would suffer from these additional fees.
6. Spread Betting Has 24-Hour Markets
Another advantage of spread betting is that it offers 24-hour markets during the trading week (Monday – Friday), allowing you to trade during any time of the day (helpful if you work 9-5). Being 24-hour allows you to react to market events outside of traditional market hours, which can lead to potentially profitable opportunities or an ability to hedge your positions quickly.
Unlike traditional investing, you must wait until the exchanges open the next day.
7. Bet With Smaller Amounts Of Money
Spread betting allows you to start with smaller amounts of money to speculate on the markets, where you can open a stake size per point from 10 p (1p if you use OANDA). This is ideal if you are a new bettor, as you can start betting with a live account with relatively low stakes, meaning you are not risking too much as you start. View the top minimum trade accounts.
8. Spread Bet In GBP Only
One hidden advantage of spread betting is that you will use GBP to bet on all markets, regardless of whether it’s a US stock or the DAX 40. This means that you will not be converting your GBP into other currencies (saving you fees), but it also helps you avoid currency risk on international assets. Because of this, you will technically make more when you profit, as you will not have to exchange the currency back to GBP.
So if you purchased 1 S&P 500 at 4500 with a CFD, you’d convert your GBP into USD and own one contract at $4500. If the market goes up to $4600, you’d make $100 on the CFD and then convert it back to GBP, roughly £80 profit for a 100-point move.
Meanwhile, with a spread bet, if you bet £1 per point instead, you would have made £100 (£1 per point x 100 point move). See how much more you would have made? Plus, it would be tax-free.
Disadvantages of Spread Betting
Although there are many advantages to spread betting, below I have some disadvantages for you to consider:
1. Not Suitable For Long-Term Investments
Spread betting is designed for short-term trading, so it is cheap to bet during the day. However, should you decide to keep a position open for longer than a day, the broker will start to charge you a rollover fee. The rollover fee is an overnight financing charge based on the interest charged on the borrowed money (through leverage), and these fees can accumulate over time, making it costly to hold the position over some time.
If you want to consider a spread bet to hold over a longer duration, some brokers like IG offer futures markets or spread bets that specifically expire at the end of the month, quarter, or year. These specific spread betting markets have much wider spreads but no rollover fees.
2. Overtrading Risk
With spread betting available 24 hours a day and quick-to-execute bets, it is very easy to overtrade. This is when you test your luck by entering as many bets as possible because you are on a winning streak or trying to chase losses that occurred earlier.
Best Spread Betting Brokers
Below, I’ve included some of the best spread betting brokers you should consider:
Pepperstone – Best Overall Spread Betting Broker
Pepperstone stands out for its impressive combination of fast execution speeds, competitive spreads, and a comprehensive range of markets. If you’re keen on using TradingView for spread betting with minimal spreads, Pepperstone is an excellent choice (as it’s one of the only brokers that offers it).
You can also spread bet using other platforms like MetaTrader 4, MetaTrader 5 and cTrader. All provide unique tools for trading Pepperstone’s extensive markets. These markets include 1000+ stocks, 28 indices, 25 commodities and 62 forex pairs, with low spreads starting at 0.7 pips on EURUSD.
City Index – Great Spread Betting With GSLO
If you are looking for a broker that will enable you to apply stricter risk management, then City Index is our top choice for guaranteed stop-loss orders. The broker’s WebTrader platform and mobile app offer a simplified interface, a decent selection of technical analysis tools, access to 84 currency pairs, 4,500+ stocks, 30 commodities, and a selection of bonds and interest rates to bet on.
IG Group – Best For The Widest Range Of Markets
To enjoy some of the best spread betting advantages, we recommend IG Group, which has an extensive range of markets (17,000+) and invented financial spread betting. Markets offered by IG include forex, precious metals, soft commodities, exchange-traded funds, futures, and options, giving you a variety of products to bet on under one account.
You’ll find that IG also has low trading fees across all of its markets, with forex spreads starting from 0.7 pips and no commission. The broker offers plenty of trading platforms to spread bet, including MT5, IG Trading Platform, ProRealTime, and the all-rounder MT4, which you can use to automate your bets.
FXCM – Good MetaTrader 4 Spread Betting Platform
If using the MetaTrader 4 platform is essential to you, then FXCM is one of our top picks (especially if you are using MetaTrader 4 to automate your bets). FXCM offers a diverse range of markets, including 42 forex pairs, 16 indices and 11 commodities on the MT4 platform. You get the advantage of tight spreads (from 0.7 pips on EUR/USD), so you can have cost-effecting trading when implementing short-term spread betting strategies like scalping.
To bolster your automation efforts, FXCM has Capitalise.ai, a no-code tool that lets AI build your strategy for you on the MT4 platform for free. If you are an advanced programmer, then FXCM also offers tools for forex strategy optimisation and backtesting with API integrations such as FIX, Java, and ForexConnect.
FxPro – Best Spread Bet Trading App
We rated FxPro the best spread betting mobile trading app because it combines excellent usability with the trading tools you’ll need if you’re on the move. What sets FxPro apart is its integration with TradingView’s advanced charting capabilities, which offer more than 110+ indicators and drawing tools, making analysis on a smaller device easy.
Beyond the app, FxPro offers a decent selection of markets, including 69 FX pairs, 14 indices, 17 commodities, and over 2000 stocks to spread bet. If you use a desktop for spread betting, FxPro also offers MT4 & MT5, cTrader, and a proprietary FxPro Platform.
OANDA – Best For Spread Betting Beginners
If you are a beginner and want a platform that can ease you into betting your own money safely, then OANDA is our top choice. OANDA offers a good selection of trading platforms to bet on, such as OANDA Trade, MT4, and TradingView.
We liked that the OANDA Trade platform provided tools that enabled you to choose your bet size to as little as 1p per point, the lowest available on any platform. The lower stake sizes help you transition from a demo account to a live account at lower risk while still benefiting from the learning experience of a live trading environment.
Not only that, but OANDA also offers competitive spreads from 0.8 pips on EUR/USD and a decent selection of 70+ forex pairs and 20+ commodities.
CMC Markets – Good Spread Bet Broker For Forex Trading
CMC Markets is a solid choice for spread betting in the forex markets. It boasts an impressive 330+ currency pairs (the most offered by any broker in the UK). You can bet on these markets with low spreads starting from 0.5 pips on EUR/USD. If you want access to other products, you’ll find that CMC Markets has over 10,000 markets available to spread bet on, including 9000+ stocks, 19 commodities, and 82 indices.
We liked CMC Markets’ NGEN trading platform, which combines the top features from MetaTrader 4 and TradingView in an easy-to-use platform with impressive tools, such as advanced charting and pattern recognition tools.
Spreadex – Best Sports And Finance Spread Bets
If you want the option to spread bet on sports and financial markets, we recommend using Spreadex, as you can bet on both through their website. The broker offers a solid range of financial markets, including 57 forex pairs, 10+ commodities, 16 indices, and over 1000 shares alongside political and sporting events to bet on.
You’ll find that Spreadex offers TradingView and a proprietary web platform to spread bet. We like the Spreadex platform as it provides a user-friendly interface with advanced technical analysis features, including tools and Pro Trend Lines (automated support and resistance levels or trend lines and channels).
ThinkMarkets – Best For Automated Trading With MT5
We rate ThinkMarkets as one of the best brokers for automating your spread bets on MT5. What impressed us is that ThinkMarkets provides VPS service, ensuring your automated bets keep running 24/7 with a 99.9% uptime guarantee. ThinkMarkets offers over 3,500 shares to bet on, 46 currency pairs, 10+ commodities, 16 indices, and small stake sizes from 10p per pip, making it a decent choice if you want to bet with low stakes.
Markets.com – Good Spread Betting Demo Account
If you want access to a broker with a decent spread betting demo account that doesn’t expire and allows you to bet on the markets without restrictions, Markets.com is our top choice. You have unlimited virtual funds and a generous expiration period, allowing you to test the markets without worrying about when the account expires.
Markets.com offers a decent choice of platforms, including the MT4 and MT5 platforms and their own Markets.com platform – which is ideal for beginners. You can bet on various markets, including 1,500 stocks, 20+ commodities, 16 indices and 28 forex pairs.
What Is Spread Betting?
Spread betting is a derivative product that allows you to speculate on the direction of an asset without owning the underlying market. You can bet on the market rising and falling, making it an excellent product to use during volatile markets and taking advantage of bear markets.
Spread betting works by staking how much you want per point to make for every point the market moves. For every point the underlying asset moves, you will make (or lose) the amount you staked.
For instance, if you staked £10 per point on the FTSE 100 at 7200 and it rose by 50 points to 7250, you would have made £500 profit (£10 per point x 50 points). In my opinion, spread betting is relatively straightforward, making it an excellent tool for a spread betting beginner or an expert.
Origins of Spread Betting
Financial spread betting originated in the UK in the 1970s by Stuart Wheeler (who founded IG Index, now IG Group) as a means to speculate on the price of gold without owning the asset. With the popularity of spread betting on gold, it evolved and was used on other financial instruments like forex, other commodities, stocks and indices.
Stock Market Trade vs. Spread Bet – Pros and Cons
All investments have pros and cons, so I will highlight the key benefits and faults behind traditional stock trading vs. spread betting below.
Stock Market Trading Pros
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- Asset ownership. When you purchase a stock, you acquire part ownership of a company with perks like shareholder voting rights, access to AGMs and shareholder conferences, and with some companies, you can receive dividends.
- No overnight fees. Because you own the shares, you do not have to pay rollover fees.
- Write off your losses. You will pay capital gains tax on realised profits on shares, which means you can also write off any realised losses to reduce your tax liability.
Stock Market Trading Cons
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- High trading costs. You usually pay a spread and a commission to the broker when buying and selling (varies from a fixed fee or a percentage of the asset purchased). In addition, you will pay stamp duty tax (0.5% of the total asset value) and capital gains tax should you profit from the trade.
- Stock trading can only profit in a rising market. Only using leveraged products can short a stock, making stock traders vulnerable to bearish markets.
- Significant capital is needed to benefit from market movements.
Spread Betting Pros
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- Access to a range of markets. You can speculate on various markets with a single account, including forex, stocks, indices, commodities, and bonds.
- Exempt from tax. Spread betting is exempt from stamp duty and capital gains tax as a derivative and gambling product.
- Ability to bet on rising and falling markets. With spread betting, you can go long (to buy) and short (to sell), allowing you to find more opportunities and take advantage of volatile markets.
Spread Betting Cons
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- High leverage. Leverage allows you to amplify your profits with smaller market movements, but it also magnifies your losses – so even a tiny movement of 20 pips could impact your account.
- Not ideal for long-term investments. Most brokers charge a rollover fee each night your position remains open. These costs can add up.
- No ownership of the asset. With spread betting, you are speculating on the price movement only, so you’ll miss out on the benefits of owning the asset, such as dividends, shareholder rights, and the ability to vote in shareholder meetings.
Managing Risk in Spread Betting
If you want to succeed with spread betting, managing your spread betting risk is essential to protect your capital. All spread betting platforms offer a series of tools that you can use to help manage your risk automatically; these are:
Standard Stop-Loss Orders
The stop-loss order appends to your current order and automatically closes your trade at a pre-set price, protecting your position against further losses.
For example, if you purchase gold at $1195.00 and expect the price to rise, you would place a stop-loss below your entry price – let’s say the stop-loss is at $1190.00. If the market falls to the $1190.00 level, then your stop loss will automatically close your bet at a loss, preventing your position from losing more capital.
This tool is valuable, as it executes when the price condition is met, meaning if you are away from your devices, the stop loss order will close your position. The position could have fallen much further without a stop loss, costing you more in losses. I always recommend adding a stop loss to your orders, especially if you are a beginner.
Guaranteed Stop-Loss Orders
These orders ensure your bet closes at the specified price level, eliminating slippage that can lead to extra losses during volatile times. The guaranteed stop loss comes with a small premium, but you only pay it if the stop loss executes. Otherwise, there is no fee if you profited from the bet or closed out the position manually. Only a handful of brokers, such as IG, CMC Markets, and City Index, offer the GSLO.
Take Profit Orders
You can think of take-profit orders as the opposite of stop-loss orders. They automatically close your bet at a pre-set price when you reach a profitable position, allowing you to secure your profits. A take-profit order is beneficial if you cannot monitor your positions all day because it can lock in your gains without direct intervention.
Key Learnings
- You will have learned that spread betting has tax benefits and is exempt from UK capital gains and stamp duty taxes.
- You have discovered many advantages to spread betting, including 24-hour trading, betting in GBP, smaller bet sizes, and betting on rising and falling markets.
- You’ve recognised that spread betting offers a broad range of markets, with the added advantage of lower trading fees than other financial instruments.
FAQs
What Is The Difference Between Spread Betting And CFDs?
The main difference between spread betting and CFDs is how they are taxed. Spread betting is exempt from taxes, while CFDs are exempt from stamp duty (because they are derivatives) but are liable to capital gains tax. Both financial products allow you to speculate on rising and falling markets and use leverage.
Is Financial Spread Betting Gambling?
As far as the UK tax office (HMRC) is concerned, spread betting is considered gambling. However, it is important to note that spread betting is similar to CFDs and other financial products that are not considered gambling. You still have to read and analyse lots of analysis to generate a trading idea based on facts.
Can you Earn A Living With Spread Betting?
Yes, earning a living with spread betting with a decent trading strategy and risk management is possible. If you decide to become a professional spread bettor, you should know that you may get taxed on the income generated through spread betting. You should consult with a professional accountant if you are considering this.
Like any financial product, spread betting has pros and cons that you may be unaware of. On this page, I’ll share the advantages and disadvantages of using spread betting.
