The Advantages of Spread Betting

Spread betting has several advantages over traditional ways of buying and selling financial assets such as shares, forex, commodities and indices.

The first, and most commonly cited, reason is that profits are exempt from tax in the UK and many other European countries. This is due to it being regarded as a form of gambling and not as investing as you never actually own the asset. This is despite the industry being regulated by the Financial Services Authority (FSA) and so seems to a slightly incoherent policy. However the government is unlikely to introduce an income tax on the profits from trading any time soon as the bookmakers could move their business offshore and the government would lose a significant amount of revenue.

This differs from traditional forms of buying financial assets in that profits and dividends are taxed and you have to pay stamp duty. In fact, dividends are taxed in a sense, as the spread betting company will only pay out 80% - 90% of the dividend in order to stop people avoiding tax, so this slightly reduces the no tax advantage, but there is still a significant benefit of not having profits taxed.

A second advantage is that it allows individuals to hold a short position. This is often hard for private investors to do using actual assets. Spread betting therefore allows individuals to bet on an asset falling in value, as well allowing them to hedge current positions.

Spread betting is also useful for individual investors as it allows them access to financial assets that they otherwise may have not been able to buy. For example an investor is able to have a position on commodities, which they may not have been able to through traditional methods.

Finally spread betting allows people to leverage their positions, so that they can have a much larger exposure to the market than the actual money they have would allow them to if they bought the asset using traditional means. However this is also the riskiest part as it allows for greater profits, but also greater losses. And since you can leverage your position this means that you can in fact lose more money than you have deposited, therefore leverage should be used very carefully.

So spread betting allows investors to have access to financial assets they may not traditionally have had, as well as allowing them to short assets in a more accessible way. It also allows people to keep more of their profits and to have greater exposure to markets than through traditional means.