Spread Betting vs Buying Stocks: Which is Right for Me?
Trading can be an incredibly complex lifestyle choice. From forex trading to commodities trading and CFDs, there’s a mind-boggling number of ways that you can trade. Some will be suited to you and your lifestyle, others won’t be. To help you decide which is best for you, in this post we compare spread betting with buying stocks.
Spread Betting
With spread betting, as opposed to buying an asset, you bet on the price movement of an asset, either going up (known as going long) or down (known as going short). For most assets, the minimum stake is £1 per point, which gives you exposure to 100 shares. If the share price moves 1p (also known as 1 pip), you can make £1. If it moves in the other direction to your bet by 1p, you would lose £1. Buy stocks with high dividend, you can find out more about them here.
Pros
The main advantage of spread betting is that you can accrue some impressive tax-free gains. You can make money regardless of whether markets are rising or falling, so there’s money to be made in the bad times as well as the good.
To protect yourself against losses, you have to put down a margin. This is also known as notional trading requirement or deposit factor and is usually a percentage of your exposure. The percentage it makes up is dependent on volatility and liquidity of the underlying asset.
The key benefit of spread betting is leveraging. This means that you need less money than if you were holding the asset physically. For instance, putting down a £100 margin could give you £1,000 of exposure in the market.
Additionally, there are a wide range of tradable investments, so you can diversify your portfolio. These include everything from UK shares to indices and commodities such as oil.
The final pro to spread betting is that it’s tax free. There’s no stamp duty to be paid on purchases and no capital gains or income tax if you’re a UK resident. But, if you make losses, you can’t offset them against other gains on your tax returns. You can read more about spread betting and tax in the UK here.
Cons
Of course, the major disadvantage when it comes to spread betting is the potential to lose large sums of money when the market moves against you. You could potentially lose thousands on the movement of only a couple of pips. In addition, when spread betting, it’s important to realise that because you’re using leveraging and even betting on the margin, losses can be magnified.
With spread betting, you can lose more than your original investment, so never spread bet with money that you’re not prepared to lose. It’s also important to not get too intrigued by the tax-free savings due to this.
To help, responsible lenders will try to minimise the impact of this for you. Some brokers will issue margin calls if you’re set to exceed the margin you set. Some will even close a position for you automatically if you slip into the red or lose a large sum.
In summary, it’s important to remember that even though spread betting can be incredibly lucrative, it certainly isn’t for the faint-hearted. As such, it’s recommended that you trial a demo account before you begin trading.
Stocks
Stocks are a form of ownership. When you buy a stock, you’re effectively investing in the future of a company and the stocks that you hold represent participation in a company’s growth i.e. by buying stocks, you believe that the company will grow and be worth more in the future (whether you hold the stock long or short term is your decision).
As a general rule, when you buy stocks, you’re not given promises about the future of a company and the profitability of the stocks you buy is entirely dependent upon the value of the company increasing. If a company’s profits grow while you own your stocks, you’ll make money. If a company’s profits slide while you hold your stocks, you’ll lose money.
Pros
Stocks are a good idea for risk-taking investors. They’re also a good option if you prefer the benefit of having partial ownership in a company. When you match this with the potential of an unlimited rise in stock price, it’s a potentially lucrative investment. I mean, imagine how much you would have earned if you’d invested in Apple from the very beginning.
Depending on the size of the company you invest in, and the number of stocks you buy, you can also get a say in board meetings and at the company’s AGM, so you can have an actual say in the way that the business is run.
Cons
However, like with spread betting, the main disadvantage is that losses are almost limitless. If a company goes out of business, then you’ll lose all of your investment. To limit losses, a number of investors have both stocks and bonds. You can also offset the risk here by diversifying your portfolio as much as possible – it’s never wise to put all of your eggs in one basket.
If you invest in stocks via a mutual fund or an equity fund then you may also be charged a significant sum for your investment. Again though, you can offset this slightly by shopping around for the best deal. However, if you invest through a fund like this, you also probably won’t get an AGM vote.
Finally, if you invest in stocks, you’ll have unknown returns, so you can’t plan your finances in advance.
In summary, there are a number of pros and cons to investing in both spread betting and stocks. It’s more than likely that one is more suited to you than the other so ensure that you read about both thoroughly and carefully, and that you understand the level of risk involved before you begin trading. Wherever possible, you should also try a demo account before using your actual money. These are great at helping you try out different trading strategies as well as ensuring that the product is right for you before you begin.
