Spread betting – Tax free trading?!
Following on from last week’s introductory article on swing trading (which can be found here in case you missed it!), today’s article centers on a rather grey area of trading; the practice known as spread betting.
Is it even trading? How does it work? We’ll answer all that soon, but the main thing you need to know is that spread betting is absolutely TAX-FREE and when done correctly, can reap some serious rewards!
Now I know you’re probably very excited at the thought of not having to pay ANY tax on your “trades” – but before we get into this, let’s actually get into the meat and bones of what Spread betting is and how it works;
What is Spread betting?
Spread betting is a type of trading where the trader can ‘bet’ that a stock will move in a certain direction, each bet has a time frame attached to it, whereby the trade will expire at the defined date.
You can bet that the stock will move in either a Long (price goes up) or a Short Direction (price goes down)
Why it’s tax free (the part you’re all interested in)
Spread betting is tax-free because it’s classified (by law) as gambling – as the trader does not influence the stock price when they place a bet.
If you compare this to the likes of an Investment or ISA account, you’d find that when placing an order, that order is reflected in the stock price – therefore, you immediately help the stock move in that defined location.
Why you should Spread bet rather than use CFD
There’s no capital gains tax! So you can trade until your hearts content, knowing that every penny you make, is yours!
No commission (Some CFD offerings have commission), although there isn’t commission on the trades that you make, you do have to bear in mind that you will have to pay a small amount in ‘Spread’ (the difference between the bid and ask price).
While there is an attached ‘spread’ for both CFD and Spread Betting, they are both very comparable and in some instances, we’ve seen certain CFD brokers increase the spread to around 5% on volatile stocks!
You don’t own the stock with either CFD or Spread Betting, so why pay tax, when you don’t need to?!
Things to be careful of
Using leverage – leverage is where you essentially borrow money that isn’t yours to trade with, a common amount of leverage is 1:5, which means that for every £1 you put in, you can trade with **an additional** £5. (to find out more about what is required before you do this, we strongly recommend you familiarise yourself with the basics here)
DO NOT start trading with more than you can afford to lose. So if you can’t afford to lose £1000 of your own money, then do not even consider investing or trading with £1000 of your own money… or anyone else’s for that matter!
Always check the spread between the bid and ask price (smaller is better), the larger the spread, the more money you’re losing before you even place the trade, so keep it small! You’ll also notice that when the stock is volatile, this spread WILL increase.
A simple one that needs to be said – check the bet expiry! Most stock spread bets have a very long life time, up to 9 years in some cases, but this does and may not apply to all bets!
So here you have the foundations and facts laid out for Spread Betting.
Let us know in the comments your experiences with spread betting, if you’ve had much success, or even if you think it’s a waste of time. This article is part of our investments series, so if you’re interested in expanding your trading knowledge, check back in with us regularly for more guides and resources!