Financial spread betting is a way of betting on shares, commodities and other financial markets without actually owning the underlying asset or holding shares in the company. I think there’s a place for spread betting in the experienced investors’ toolkit but if you are new to the world of financial markets, it could be worth approaching spread betting with extreme caution.
Spread bet companies offer derivatives aimed at following the ups and downs of the underlying assets. You can buy or sell the derivative at the prices offered by the spread bet company, so it feels like you’re investing in shares and other assets directly. However, it’s different for several reasons, and I think a safer strategy would be to stick to investing in real shares or funds.
Many investors end up losing money with spread betting. For example, one provider flashed this risk warning when I opened its platform: “76% of retail investor accounts lose money when trading spread bets and CFDs with this provider.”
Spread betting has become popular because it offers several advantages. For example, all your gains (if you have any) will be free of tax. But I reckon the government knew what it was doing when it excluded spread betting from the tax system. Most investors lose money with the activity and the government probably didn’t want all those losses offsetting tax bills up and down the country.
Another advantage is that you don’t pay any stamp duty or stockbrokers’ commission when you buy and sell positions. However, the spread bet company makes money on the spread between the buying and selling prices it offers. Nevertheless, trading charges can be lower than investing directly in shares, which opens the door to trading with much smaller positions. Some providers allow you to place bets at just 50p per point, for example.
Plenty of options
Spread bet companies offer plenty of choice for trading. You can often bet on the movements of many public companies’ shares on the London Stock Exchange and abroad, and on commodity prices, foreign exchange (Forex), cryptocurrencies, guilts, bonds, indices such as the FTSE100, and other things.
Other advantages include the ability to go short easily and the leverage that spread betting companies tend to offer. But going short and financially gearing up your positions are two dangerous activities that could be contributing to those dire statistics about investors losing money with spread betting.
I’d stick to this
I think sticking to investing in shares or funds directly via an online stock broker could be a better way to make money. If you choose your investments carefully and adopt a ‘company owner’ mindset you can do very well with shares over time without frenetic, leveraged and often short-term trading.
For example, top performer Burford Capital turned £1,000 invested into £13,500 for its shareholders over just five years. Find a few shares like that and you’ll be beating most short-term traders hands down. Indeed, compounding your gains over time with traditional shares is a proven route to generating wealth and it can be a lot easier on your nerves than sweating over a spread bet account.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.