We've all heard of shares. But why do we keep hearing about Financial Spread Betting in the same context? Well, the truth is that financial spread betting is one of the fastest growing and most exciting ways of speculating on the movement of an underlying share or index. For many investors it has become a flexible and cost efficient alternative to trading ordinary shares. This article aims to set out the benefits of spread betting above and beyond the advantages of investing in shares. Read on for more details...
How does it work?
In very simple terms, instead of buying shares that you think are going to go up in value, or sell shares that you think are going to go down in value, you bet on whether they think they will go down or up. And it's not like a football match where you are either right or wrong. No, with financial spread betting, you be an amount per point. So if you think RBS shares might go up, you might 'buy' at £10 per point. If RBS shares go up from 40p to 50p, you have made 10 points, which equates to £100. However, if they go down - say - to 35p, you have lost 5 points, which equates to £50. Simple, huh?
What are the advantages of Spread Betting?
• Stamp Duty is not payable (saving 0.5% compared to a normal share purchase)
• The ability to 'hedge' existing positions
• The fact that all bets will normally be undertaken in sterling, thereby removing the exchange rate risk from bets on overseas stock.
• Profits on spread betting are not subject to capital gains tax*.
• Direct commissions and fees are not payable; the spread betting firm makes it's money from the spread.
• Whereas with ordinary share dealing accounts you can not profit from a fall in share price (selling 'short') with spread betting you can profit from falling or rising markets.
• Being leveraged products, they are traded on margin therefore bets can be placed with a relatively small initial outlay.
• A single account can give you Access to far greater range of financial markets.
• The ability to place very small bets, some companies let you place a trade of as low as 1p per point.
* (Tax Laws are subject to change)
And what are the disadvantages?
• Some markets may be very volatile and with leveraged products you could incur very large losses if your position moves against you.
• It may be less suited to the long term investor
• You have no investor rights, such as voting rights, dividends or corporate actions.
What can I trade?
Because you are not actually buying or selling the actual underlying instrument. the range of instruments that you 'bet' on can be far greater than simply underlying shares. In fact it is possible to bet on a number of underlying financial instruments:
• Stock market indices such as the FTSE or NASDAQ.
• Individual shares from the FTSE 100 and FTSE 250, but also from leading US and European shares.
• Currencies, FX.
• Commodities such as metals and oil.
• Interest Rates both short term and long term.
• Futures and options.
• Bonds.
In summary
Financial Spread Betting provides a cost effective and leveraged product to allow traders to take advantage of market movements, whilst at the same time allowing the trader to invest small amounts of money until they are confident in the product.
SS Smith writes extensively about Financial Spread Betting and owns the specialist web site http://www.spreadbettingguide.co.uk
Article Source: http://EzineArticles.com/?expert=SS_Smith
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