Spread betting account: The pros and cons
In this article, we will analyse what spread betting is, as well as the pros and cons of having a spread betting account.
What is a spread betting account?
This is a type of leveraged account which gives you the opportunity to start spread betting, a type of derivative trading that is tax-free in the UK.
Unlike other ways to make money in the financial markets, spread betting accounts allow traders to trade with leverage, gaining exposure to a larger position and amount of capital. Costs may depend on the broker’s trading conditions, but as a rule, it is limited by the number of funds available in the trader’s account.
Let’s assume that Apple shares are worth $120.50 apiece.
We enter the market and set the stake size at $1 per point, predicting a price increase of 10 points. After a while, the price rises to $120.60, meaning we earned $10. If the price goes down, the loss will accrue $1 for each point fall. If you do not close the position to cut losses, the option of losing the entire deposit is possible.
Usually, the minimum bet starts from 1 unit of the deposit currency (USD, EUR, GBP, CHF, JPY, etc.). But the upper limit, as a rule, is limited by the broker’s conditions (most often up to 100 units of the base currency), or the size of the trading deposit, the amount of which should be sufficient to cover the margin when entering the market. The size of the margin depends on the broker’s trading conditions.
To learn more about spread betting accounts, click here.
What are the top features?
A derivative account allows you to make larger transactions in terms of volume than with investments, for example. Most often, traders use bets on changes in price of the following:
When spread betting, it is possible to place stop orders such as a stop-loss, which allows you to prevent losses as much as possible. Stop-losses can either be free or involve a commission for its use (like GSLOs).
Pros and cons of these accounts
- Small starting capital. Already with ten dollars, it is quite possible to place bets.
- Comparatively low commission and spread costs, which may differ for each broker/dealer.
- Trading is available around the clock on weekdays.
- The ability to personally set a price for each point of movement.
- The main disadvantage of spread betting is the low odds for easily predictable events. Price movements predicted by fundamental analytics will not bring significant gains.
- Also, it is often equated with bookmaking, since in essence it is like that and is on a par with sports betting and even horse racing. Besides, it is often compared to playing in a casino, with the only difference being that the financial instruments of spread betting lend themselves to technical and fundamental analysis, as in the financial markets, which allows you to place bets reasonably, based on a forecast.
How to choose the best spread betting account
To reduce non-trading risks, you can consider reliable brokers that have authoritative regulations.
The only country where the regulation of spread betting is brought to the state level is the United Kingdom. The British regulator FCA is engaged in licensing and control of brokerage companies providing such services. According to British law, financial betting is equal to sweepstakes and is not taxed for residents of the United Kingdom. Note that tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.
The official FCA UK website has a list of brokerage companies licensed by the regulator.
This type of betting is perceived with caution among professional traders and investors. By choosing a reliable spread betting broker and applying a sound trading strategy that takes into account risk management, this will make your trading activity less risky.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money. Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.