Financial spread betting comparison

Financial Spread betting comparison

This is a step by step spread betting comparison of the differences between our example of spread betting compared on a purchase of 1,000 shares of Bp and and the equivalent trades when buying the stock through a traditional Stockbroker?

The major difference is that  when you buy a stock through a Stock Broker account you then own a share of the company whose stock you purchased. You are the registered owner of however many shares you purchased and as such will receive the benefits of owning that stock such as any dividend payments and associated voting rights.  

In a financial spread bet trade, you do not actually buy and own the underlying investment. You are simply taking a position by betting on whether the stocks share price will go up or down.

This may seem like a bad deal but one of the key advantages of spread betting is that you do not have the expense of the actual cost of those shares or dealing costs associated with buying them. You also have the added advantages that there is no stamp duty to pay and the  profits from financial spread betting in the UK are currently tax free (Tax Law can change and may differ in other jurisdictions outside the UK)

Financial Spread Betting Comparison

Lets compare the financial spread bet trade example that we gave, where we went long (bought) a 1000 shares of Bp.
 (remember, you do not actually purchase the shares in Spread Betting)

Bp shares are quoted at  626p  (628p to buy and 624p to sell)

Stockbroker trade -  You buy 1000 shares at 628p 
Spreadbetting trade - You but (go long) at £10 per point at 628p

Spread Betting Compared
Spreadbetting Outlay £ Stockbroker Outlay £
Cash outlay = 10% of the deal value 628.00 Cash outlay  6,280
1000 x 628p = £6,260 - 1000 x 628p
Stamp Duty 0 Stamp Duty 31.40
Dealing Costs 0 Dealing Costs (Average) 30.00
Total funds allocated 628.00 Total funds allocated 6311.40

Spread Betting Comparison - Outcome 1

You got it right -  the  price rises 50p and you sell at 574p (-54p)

Outcome 1
Spreadbetting Profits - £
Stockbroker Profits - £
Gross Profit  46 x £10                    460.00 Gross Profit 428.60

- (1000 x 674p)  6,740 - 6,311 -
Dealing Costs 0 Dealing Costs (Average) (-30.00)
Capital Gains Tax 0 Capital Gains Tax (assuming 40%) (-139.40)
Net Profit 460.00 Net Profit 259.20
Net Percentage gain 73.2% Net Percentage Gain 4.1%

Spread betting comparison - Outcome 2

You got it wrong -  the  price loses 50p and you sell at 574p (-54p)

Outcome 2
Spreadbetting Loss £ Stockbroker Loss £
Gross loss  54 x £10                       540.00 Gross Loss 571.00

- (1000 x 574p)  6,311 - 5,740 -
Dealing Costs 0 Dealing Costs (Average) 30.00
Capital Gains Tax 0 Capital Gains Tax (no profit made) 0
Net Loss 540.00 Net Loss 601.00
Net Percentage Loss 86.6% Net Percentage Loss 9.5%

*  Losses made from the Stockbroker trade may be able to be offset against capital gains on another trade. This is not possible in spread trading as profits are not liable to capital gains tax

Spread betting comparison - Summary

As you can see from this spread betting comparison, in the compared trades above, dealing costs and taxes have a very large bearing on whether a trade is going to be potentially profitable or a loss maker so keeping costs to a minimum is essential to successful trading whether that is through a financial spread bet, trading cfd's or traditional trading through a stock broker.

In outcome 1- the winning example trade, you can clearly see the advantage from spread betting compared with traditional trading because the stock broker trade barely scraped a profit at 4.1% and the spread trade would have netted a very useful 73.2%

Bp shares would have had to rise by around 22p or so just to break even on the stock broker trade. Yes, 22p would have been swallowed up by costs and taxes.

In outcome 2 - the losing example spread bet trade, you can clearly see the huge potential risks involved with spreadbetting. The potentially large losses are due to the effect that trading on margin has. This means that being successful in spread trading requires a very strong money management strategy, it is essential to manage risk and limit losses.

Financial Spread Betting Comparison - conclusion

Our conclusion at Traders Day Trading, is that financial spread trading can be an extremely valuable tool for making money on the stock markets. The low costs involved coupled with the favorable tax implications make it extremely attractive as a means of trading for many traders and especially for short term traders who are looking for profits from smaller moves.

The negative side is that unless a trader has a trading strategy with a reasonably tight control on money management then they are unlikely to be successful in spread betting and should perhaps look at other forms of trading such as trading CFDs or stick to traditional trading through a stock broker.

Where to spread bet - financial spread betting companies reviews***

Capital Spreads - Capital Spreads are one of the leading financial spread bet companies in the UK and were voted the Best Spread Betting Provider of the year in 2009 by Financial Times/Investors Chronicle. -  They have an excellent software package and offer some of the tightest spreads available.....Capital Spreads review

IG Index - IG Index was the first, and are probably the best known
of the spread betting companies in the UK. Once again, they were voted Shares magazine's Best Spread Betting Firm in 2009, for the third year in a row. -  IG Index offer an award winning charting software package and a range of market analysis....... .IG Index review

Risk Warning

Spread betting and CFD trading carry a high level of risk to your capital and can result in losses that exceed your initial deposit. They may not be suitable for everyone, so please ensure that you fully understand the risks involved.


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