Thursday, January 12, 2012

Financial Spread Betting

In the United Kingdom, a type of financial trading called "spread betting" is available to investors. Spread betting can be used as a derivatives investment that allows a trader to cash in on the price movements of many financial markets, such as indices, shares, currencies, commodities and more.

Spread bets can be used to speculate on price movements regardless of whether the general market is rising or falling. If you go long (buy), profits rise in line with any increase in that price. If you go short (sell), profits will rise in line with any fall. Similarly, if you go long on the price and the underlying stock price falls, you will lose money.

In order to participate in financial spread betting, you must first open a margin account with a broker such as City Index. When you place a trade, you are required to deposit a small percentage of the full value of your position. The potential for both profits and losses from an initial investment is significantly higher than in traditional trading. The required margin is typically between 1% and 10% of the total value of your position, depending on the market. City Index offers prices on over 12,000 spread betting markets.

In spread betting, two prices are quoted for all spread bets – a buy price (the price at which you can go long if you expect the underlying market to rise) and a sell price (the price at which you can go short if you expect the underlying market price to fall). The difference between the "buy" price and the "sell" price is known as the spread.

A graphic from the City Index website gives additional insight into the spread.

An additional benefit of spread betting is that profits made in spread betting are exempt from UK Capital Gains Tax. This automatically saves you a large percentage of your profits that you would normally have to pay if you were to trade the underlying markets. As spread betting is a derivatives product, it is also exempt from UK stamp duty. Tax laws are subject to change and depend on individual circumstances.

Lastly, as with any leveraged derivative investment, you have the potential to lose more money than you invest. Do not invest with money that you cannot afford to lose, and consult a financial advisor if you are unsure if financial spread betting is suitable to you.

Disclaimer: This material is for general information only. It is not intended as an endorsement, recommendation or sponsorship of any investment. PFStock does not provide investment advice. This post is sponsored by City Index.

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