Spread Betting vs. Shares Trading: Advantages and Disadvantages

This article describes the relative merits and risks associated with spread betting and shares trading.

S pread betting is part of a new trend which allows investors to speculate on the stock market without purchasing the underlying shares. Like its cousin, Contract for Difference (CFD) Trading, it involves speculating on the direction a particular stock will take. For example, if you think a certain stock will rise then you place a certain amount of money (sometimes as little as £2) on this possibility. If the share rises then your investment pays off and you add to your bank balance. If the share falls then you lose money, generally significantly more than the bet you placed initially.

Advantages of spread betting over traditional shares trading

First, profits from spread betting are not taxed. There is no stamp duty and no capital gains tax on spread bets, which means that you stand to make a significantly larger sum than with traditional shares trading. Second, spread betting allows investors to play the stock market for a fraction of the cost of shares trading. Another advantage of spread betting is that going short is the same as going long. Short selling is when a trader believes that a particular share is in a downward trend and therefore decides to sell. There can be various obstacles to this, since many brokers will not allow the short selling of shares.

With spread betting, on the other hand, there is no difference between playing the short side and playing the long side, and therefore betters avoid the complications generally attached to going short on shares.

Disadvantages of spread betting over traditional shares trading

Prospective spread betters should be aware that there are also disadvantages attached to spread betting. Instead of buying a share at the market price, as you would with shares trading, you must go through a spread betting company such as CMC Markets, who also specialise in CFD trading. The spread betting companies formulate the rules and set the buying (bid) price. Although they will generally not levy a transaction charge, as a normal stockbroker would, you should be aware that spread betting effectively disguises a larger charge within the spread.

The potential for spread betters to make large profits is generally more limited than that for share traders. Share traders are able to consider the potential for a company’s share price performance based on its assets, cash flow, and growth prospects. Spread betters on the other hand bet on the market in total.

Despite these disadvantages, spread betting can be an attractive option to anybody who has set convictions about the direction of a particular stock while lacking the capital to purchase it. It is favoured by seasoned investors, but anybody with a good knowledge of the stock market and a solid financial know-how can become a spread better. Inexperienced spread betters should favour a lower risk company such as Finspreads, while Halifax and Barclays offer services suitable for more experienced traders.

The opinions and statements expressed in this paid article reflect those of its authors and not those of AlphaProfit.

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