Financial spread betting
Financial spread betting is a way of making money out of the performance of shares, without having to buy them.
Investors bet that shares will either rise or fall more than the betting company does.
The further the share moves away from expectations, the more money the investor gets – but by contrast the further the share moves in the opposite direction, the more money the investor can lose.
For example, if the betting company predicts a share will rise between one and three per cent, an investor can bet that it will rise by more. For every per cent the share increases in value above three per cent the more money the investor makes. By contrast, if the share rises by less than one per cent then the investor loses more money for every extra point the stock drops in value.
Spread bets can have "stop loss" points on them, where if the price of the stock moves too far away from your position the bet will stop automatically – limiting losses.
The bets have a set time frame – although positions can be closed out before that point.
Spread betting has a number of advantages over traditional trading. Firstly, it is free from both capital gains tax and stamp duty (charged at 0.5 per cent of UK equity purchases). Secondly, investors only need to deposit a small percentage of the full value of shares to benefit from their performance. Thirdly, investors can bet on shares losing value as well as gaining it.