Trading shares using a financial spread betting account
Ever thought you would like to trade shares more frequently, but were worried that the commissions you pay your broker every time you trade eat into the value of your portfolio? Financial spread betting could be the answer.
Spread betting or CFD (contracts for difference) companies quote prices on thousands of shares, and not just large corporations like the FTSE 100 constituent companies either. Financial spread betting can be a cost-effective way to speculate on share prices over the short term, be it days, weeks, or sometimes even months.
Some people like to hold shares for years at a time, but if you see yourself trading more frequently, it is worth considering spread betting or CFDs because spread betting companies usually charge minimal or zero commissions (check with your spread bet provider to find out). In addition, because with a spread bet you are not actually buying the physical share itself, you don’t have to pay any custody costs. This is the fee that is usually charged by a broker or bank to hold a share on your behalf and is usually levied as part of your monthly account cost.
Another advantage of trading shares using a financial spread betting account is the treatment of dividends. These are paid out by listed companies twice a year to their shareholders out of their profits for that year. If you are spread betting, while you do not hold that company’s shares, you can still receive the economic benefit of the dividend. Most financial spread betting and CFD trading companies will credit your position in that company with 90% of the value of the dividend you would have received had you been holding the physical shares.
Some traders like using spread bets for this reason: they may have exhausted their capital gains tax allowances for the year already, taking dividends from shares they hold in their physical share trading account, where they hold actual stocks. Financial spread betting lets them get the benefit of dividends outside this, because spread betting is tax free in the UK. Bear in mind you are still only getting 90% of the dividend, not the full value, but at least it does not count towards your CGT allowance.
Having said this, if you lose money while using spread betting, you cannot off set these losses against other capital gains as you could with physical share trading.
Also, unlike spread betting, contracts for difference (CFDs) are subject to UK capital gains tax, including on dividends. Because, like with spread betting, you are not purchasing actual stock in a company, UK traders do not have to pay stamp duty when trading CFDs, but they are still liable to CGT.
Another reason to open a financial spread betting account to trade shares is because you can use a spread bet to go short on a share price. This lets you take advantage of falling share prices, something you can’t do otherwise unless you are a multi-million dollar hedge fund operation! All spread betting companies will quote a sell (or ‘bid’) price on shares. This is the price you would use if you wanted to take a short position. If the share price falls, you would actually make money. If it goes up, on the other hand, you would lose money. It behaves inversely to a normal long position.
Once you decide to get out of your short position, you can do this by executing using the buy or offer price. However, bear in mind that if you are short on a stock when it pays a dividend, your position will be debited the value of the dividend, not credited as it would be if you were long the share.
Financial spread betting can also let you hedge a share price. In this case, an investor with a large chunk of stock who is worried the company’s share price might fall could open a short trade using his or her financial spread betting account. That way, if the price did come down, the trader would still make some money, as the short bet would off-set some of the losses from the physical share portfolio.
Spread betting lets you trade on margin – you only need to deposit a portion of the total trade. This means you can hedge a physical share position with much less money than the value of the physical shares.
The leading financial spread betting companies quote prices on literally thousands of shares, including many smaller company stocks, investment trusts, and exchange traded funds. In addition, spread betting companies let you trade shares easily in foreign markets like the US, Germany or Japan while still using a sterling account. This is more expensive to do with a conventional stock broking account, but with financial spread betting or CFD trading, because you are only trading the share price, not seeking to acquire ownership of foreign shares, you can trade Australian or Japanese share prices as easily as those listed in London. Not only that, but you don’t have the currency risk involved: with physical shares (and CFDs), you always need to think about how changes in foreign currencies are affecting your shares. With spread betting, that currency risk is hedged out: you can trade Tokyo Stock Exchange prices as if they were London ones without worrying about the sterling/yen exchange rate!