The Mechanics of Spread Betting on Shares

Spread betting on individual shares is different to trading shares (buying/selling) on the market. This important distinction has many inherent benefits for spread bettors. With spread betting, the difference over conventional shares trading is that you place a wager of X amount that is dependent on the per point movement of the share price. These are defined as one unit changes in the price of an equity/stock. In the United Kingdom, that is designated as 1 penny or £0.01, and in the United States it is designated as 1 penny or $0.01.


This is not always the case in different countries, notably in Asia where a one-unit change is designated as one Japanese Yen (¥1). In the UK however it is possible to spread bet in GBP for every one-unit change on a US stock, without having to conclude a foreign currency conversion. Less exposure to currency fluctuations is particularly useful in times where rampant volatility is evident in currency markets. This also allows for cost savings in the form of commissions and associated fees.


The Costs of Spread Betting vs. Conventional Shares Trading

When you’re spread betting on shares for example, there are many inherent benefits over traditional shares trading. In the latter case, you would typically purchase your shares through a broker who then charges a commission or fees on every trade that is conducted. With spread betting, the spread incorporates all of the associated fees that you would be paying. Spread betting companies typically take the buy/sell price and add in their spread. Take the following example as a case in point:


BHP Billiton plc is trading on the London Stock Exchange (LSE). The selling price may be 943p and the buying price may be 943.8p. If your spread betting brokerage ads on a 0.1% spread, you may be looking at another 0.94p. This will be added by the spread betting provider in two ways – 50% on the buy price and 50% on the sell price. Your final quoted price would be 0.47p higher on the buying price of 943.8p and 0.47p lower on the selling price of 943p.

Spread Betting on Shares


How Spread Betting Is Advantageous to Traders

There are many benefits to spread betting trading, notably the fact that there are no capital gains taxes and you don’t have to pay stamp duty. However, it should be noted that it is incumbent upon the individual trader to comply with the tax regulations. In typical shares trading it is rather difficult to go short on shares. The reason being: you are buying the shares/selling the shares as opposed to betting on price movements.


With spread betting, your options are clear: you take out a sell position or a buy position accordingly. To make equivalent profits in traditional shares trading, brokers would have to be paid to ‘borrow the shares’ and then ‘sell the shares’ for you. And of course there is always the issue of leverage with spread betting.


This works to your advantage since you do not have to have all of the capital outlay upfront to take out a rather large position on individual shares. Your margin payment could be as low as 5% when taking out a £1,000 position on a share such as Alphabet Inc (GOOG) or Microsoft (MSFT). This means that your initial outlay is just £50.


Leverage is Inherently Risky but Trades Can Go Your Way

Nonetheless, spread betting can be risky since leverage can go the other way as well. If you happen to make the wrong bet assumption and the share ends in the opposite direction to the one you forecast, you will have to pay for your losses.

Ready to start spread betting on shares? Check out our full UK Spread Betting Brokers Comparison!

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