Simply put, financial spreadbetting is a tax free alternative to conventional trading.
Spread-betting is a very easy concept to understand. Indeed, if you already trade anything at all then you should have no trouble understanding the concept.
Do not get confused. For those of you out there who already trade derivatives, well, spreadbetting is just another derivative product. You do not actually buy the underlying stocks, you just speculate (bet) on where you think the prices will be at a point in the future. When you look at spread trading in this way, it becomes obvious that is basically the same as your regular trading in any other derivative instrument. When you close your position, your betting profit or loss is calculated as the difference between the opening price and closing price of the bet, multiplied your stake.
What are the attractive features of spreadbetting?
1. Spread betting is a derivative
As I explained above, spread-betting is just another derivative instrument. Like the typical derivative, spread trading gives you exposure to the movements of the underlying stocks, bonds, currency or commodity, without the need to actually own the financial security being traded.
2. Spreadbetting is a margin instrument
Typically, when you place a spread bet, you are only required to deposit about 10 percent of the total value of the trade.
This means that you get a bigger bang for your buck. Of course, you should be mindful that you can also lose more than your initial deposit if margin acts against you when a trade goes wrong. Whatever you do, always trade with discipline and never forget to use a stop loss.
3. It is capital gains TAX FREE!
The major advantage of financial spread-betting as it is currently structured is the fact that profits are tax free. Of course, as the spreadbet brokers are always quick to point out, tax laws are subject to change. But for now, the exemption from capital gains tax which can be as high as 40 per cent in the UK and Ireland makes this a potential lucrative and attractive vehicle for profitable short term traders.
Of course, it goes without saying that your ability to benefit from this particular feature of spreadbetting depends on the current legislation in your country. For those in the UK for instance, financial spread betting is classified as a bet rather than an investment or trade, and as such, is free from capital gains tax. So, you keep every profit you make. This tax-free attribute has meant that spread betting has enjoyed tremendous success and popularity in various jurisdictions including the UK and Australia.
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