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Financial Spread Betting - A Beginners Guide

By: SS Smith

In this article we are going to assume absolutely no prior knowledge of spread betting whatsoever. We'll show you what it is, how to do it, and why it is becoming so popular.

One way to invest in financial markets is to buy equities, or company shares. This isn't hard to do, you simply need to open an account with a stockbroker and let them know how many shares you wish to purchase in any particular company. Now, as the shares are traded openly on the stock market, the price of these shares varies from moment to moment. Some things will cause the price to go up, and some things will cause the price to go down.

Let us say that you were interested in Company X, whose share price is currently 100p. If you had £1,000 to invest, you could purchase 1,000 shares. You buy those shares because - for whatever reason - you believe they will rise in price. Sure enough, two weeks later the share price has risen to 125p. You could then sell your shares for £1,250, realising a £250 gain.

Of course, this calculation has been simplified for the purposes of this example. In the real world you would have to pay commission and stamp duty of approximately £25 in relation to this transaction. And if your annual gains exceeded your annual CGT allowance, you would also have to pay tax on the remaining gain at your highest rate of personal tax.

So what would be the difference with Financial Spread Betting by comparison? Well if you think the underlying financial instrument will go up in price you ‘Buy' and if you think it will go down you ‘sell'. So in this case you might ‘buy' a spread bet at £100 per point at 100p. On the same equity noted above, two weeks later you would ‘sell' the same to close the trade, but at 125p. And you gain would be £2,500, being the 25p improvement at £100 per point.

Once again the calculation has been slightly simplified to help explain the principle. In reality there would be a ‘spread' price quoted to you of perhaps 99-101 (hence the name ‘spread' betting), which means you would actually buy at 101p rather than 100p. And when you came to sell you would likely be quoted 124-126, so you would actually sell at 124. So the profit would be slightly lower.

Nevertheless, the gain is significant and there are further benefits here too. No commission or stamp duty is payable on spread betting. More significantly, no UK tax is payable on gains either. This could be a significant point if you make enough gains in a year to use up your CGT allowance, particularly if you pay income tax at the top rate.

An important thing to remember is that Spread Betting is described as a ‘leveraged' product. It is this leverage that allows you to make significantly greater gains out of your capital than with direct equity investment. However this leverage can also cause your losses to be significantly higher than would have been with equity investment if you are not extremely careful. Ensure you fully understand all the risk implications before undertaking any bets.

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S Simon Smith writes extensively on Financial Spread Betting and recommends http://www.financialspreadbetting.co.uk as the site of choice for trading in Financial Spread Bets

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