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.
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. 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. The Ability To Bet On Rising And Falling Prices
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).
3. Ability To Trade On A Wider 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.
4. Access To 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.
5. Leverage Increases Exposure To Markets
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.
6. Smaller Bet Sizes And Minimum Deposits
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.
7. Lower Trading Fees
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.
8. Use Of GBP As The Base Currency For All Markets
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. No Long-Term Trading Opportunities
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.
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.
How Can You Manage Risk When 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:
1. 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.
2. 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.
3. 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.
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.
Share Trading vs Spread Betting
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
- 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
- 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
- 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
- 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.
What Is The Best Spread Betting Broker?
Based on comparing broker facts and our testing we found the best spread betting platform in the UK is Pepperstone. They were the first broker to introduce TradingView which we consider to be the best spread bet trading software. The broker also has the fastest execution speeds, competitive spreads, award-winning customer service and one of the widest range of markets. This includes over 1,000 stocks, 28 indices, 25 commodities and 62 forex pairs, with low spreads starting at 0.7 pips on EURUSD.
Other great brokers providing UK traders with the ability to spread bet include City Index which has the best mobile trading App, OANDA which is the most trusted broker and IG Group for its wide range of instruments including weekend markets. Finally, an honourable mention goes to Spreadex which is the only broker allowing financial spread betting and the ability to sports spread bet although it requires two seperate trading platforms.
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.
What Is The Most Popular Spread Bet Trading Platform?
MetaTrader 4 (MT4) is the most popular software for spread betting and one of the oldest. Almost every spread betting broker offers MT4 in the UK with most details on our MT4 spread betting section.
- 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.