Spread betting is one of the most popular forms of modern day trading used by amateurs and brokers a like. Its biggest attraction is the potential for massive profits that can be made in seconds if you manage to predict market fluctuations accurately. The obvious downside to this is that that things can just as easily go the opposite way if you bet wrong, and money can be lost just as instantaneously.
The basic premise of spread betting is simple for even trading novices to get their heads around. The ease at which you can play the game, and the excitement that comes with it, however, should never be something that lulls you into thinking this is an easy field to master. As in all financial matters it is almost always only the most skilled and experienced who continually come out on top. Here’s a quick look at some of spread betting’s pros and cons.
Pro: It’s Tax-Free
In the UK spread betting is considered to be a form of gambling, making any profits made from it free from stamp duty and capital gains or income tax. This is clearly a big pro as it means you don’t need to worry about including profits on your tax return. On the other hand, this can also be something works against you as if you make losses, you won’t be able to offset them against other gains.
Con: High-Risk of Big Losses
The golden carrot of big gains in a matter of minutes or even seconds is what draws a lot of people into spread betting, but the possibility of losing money is also very high. Of course this is true when investing more traditionally in shares or other collective investments, but the difference here comes in as spread betting uses leveraging. Your initial stake may be quite small yet still open you up to a large market exposure. This is great when you see the potential for gains, but also means you could end up losing money you don’t have if you bet badly.
Pro: You Can Go Short
A lot of people like the way that spread betting allows you the ability to enter volatile markets and bet against a currency, company, or almost anything else that you can think of losing value. Basically you are not restricted to working out which companies are gong to perform the strongest. Spread betting lets you make money when you beat the spread and the company or thing you are trading on performs more poorly than expected.
Con: Wide Bid-Offer Spreads
The guys who are taking your bets are simply not all that interested in you winning. They also maximise their potential for not losing at the same time by making the bid-offer prices quoted on the spread wider than if trading the cash product. This is why you really need to know what you are doing if you are to consistently come out on top.
Pro: The Sheer Variety of Available Bets
One of the great advantages of spread betting is that it has opened up markets that were traditionally only available to brokers. The companies that offer spread betting are able to give you the opportunity to bet on thousands of shares, currencies, indices, commodities and treasuries from all over the world. This gives you the potential to really grow into spread betting and learn which market is the one that you have the best understanding of and therefore the greater chances of winning more often.