Financial Spread Betting Vs Share Dealing
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Financial spread betting could be defined as 'speculating on the movement of the price of a financial instrument'.
A spread betting company defines a spread, and predictions are made on whether the outcome will be above or below this spread. The profit or loss depends on the direction and the extent of deviation from the spread once the event is over. Financial spread betting can be an effective alternative to share dealing. Of course many users use spreads to complement their long term share dealing.
Share dealing is the buying and selling of shares in companies in order to make a profit. Share dealing in the UK is done by trading on Stock Exchanges. Shares can be bought when a company first comes to market, an IPO (Initial Public Offerings) or through the stock market once the shares are in circulation. Investors can buy and sell their shares. The fluctuations of a share price depends upon many market factors including the economy, company performance, takeovers (and takeover rumours), directors buying / selling shares in their own company etc
Before you consider investing your money, it's essential to understand and compare the relevant factors.
Risks
Financial spread betting offers many advantages over traditional share trading. But it is essential to understand that the risks involved can be higher. You can lose more money than you initially invest.
So before you start with your spread betting, understand the risks involved and study the jargon and market well enough so as to get a good idea of the downside of financial spread trading. Make the most of the wide range of risk management tools such as stop loss orders, i.e. automatically closing a bet if the value of the spread moves by a specified amount. To use them, you need to understand how to spread bet. Remember if you are unsure of your trading you may want to start with small bets.
Commission Free
For traditional share dealing in the UK, you need to pay a brokerage commission.
But with financial spread bets on shares, you do not pay any commission, irrespective of how often or how little you trade. With financial share trading you can also take advantage of a number of tax benefits*.
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Make Money Up or Down
Whether the stock market goes up or down, when you spread bet on shares you can make money even with a receding stock market. However unlike share dealing, you do not actually own the shares and you cannot offset your losses against capital gains tax.
Global Markets
Financial Spread betting allows you to feel the pulse of the international market and offers more avenues and methods of increasing your investment portfolio than share dealing in the UK. Apart from shares you can also trade stock market indices, currencies and commodities, thereby giving you many more options to complement your trading knowledge. If your strength is the foreign exchange markets then you are possibly best off sticking to forex spread betting.
Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
'Financial Spread Betting vs Share Dealing' by KK, updated 01-Dec-08
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