Spread betting tends to be a more accessible way to deal on shares compared to traditional trading, particularly in terms of the way you take a position and the costs involved.
The mechanics of dealing
With traditional shares trading you buy and sell the shares outright for a particular market price. When spread betting, however, you bet a certain amount of money per point of movement in the share price.
A point tends to be the equivalent of a one unit change in the share price. For UK companies that's normally a £0.01 change, for US stocks it's $0.01 and for many European shares it's EUR 0.01. There are some exceptions, however - like Japanese stocks where one point equals a ¥1 move - so it's always worth checking with your provider before placing any bets.
Your deal will usually be in GBP (unless you decide to change the currency) which means you can bet, for example, £5 on every $0.01 change in a US stock. This is very different from trading shares in the traditional way, where you'd need to change pounds to dollars to buy those US shares, then convert dollars back to pounds when you sold them.
For this reason, spread bettors who deal on international shares are generally less exposed to currency fluctuations than traditional share traders (and they can also potentially save on currency conversion fees).
The costs
In traditional trading, you generally go through a broker who buys or sells the shares on your behalf. Your broker will trade the shares at the current buy or sell price available in the underlying market and then charge a commission, based on the value of the shares.
When spread betting, on the other hand, the cost of dealing is included in the spread (you can remind yourself how the spread works by going back over our 'Spread betting and CFDs' course). Providers will take the current buy and sell prices and add their own (usually) percentage-based spread onto it, which is influenced by factors such as the liquidity of the market, its volatility, and the date the bet expires.
Example
Let's say A plc - a major UK stock - is trading in the underlying market at a sell price of 201.5p and a buy price of 201.7p. Your spread betting provider might charge a dealing spread of 0.1% on this stock, so approximately 0.2p.
Your provider will add half of this 0.2p spread to the buy price and deduct half from the sell price, giving you a final quoted price of 201.4p/201.8p.
Spread betting on shares is also free from stamp duty and capital gains tax. Remember, tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
Going short
With spread betting it's generally easier to go short on shares than it is via traditional trading - again because you are betting on the share price, rather than physically buying and selling the shares themselves.
In spread betting, you can simply open a 'sell' bet on your chosen market, which is just as straightforward as buying. To profit from a falling stock price in traditional shares trading, you would have to commission a broker to borrow and then sell the shares on your behalf. You can find out more about that process in the 'How trading works' course.
Leverage vs non-leverage
With spread betting, your outlay to take a position is much lower than it would be if you bought shares in the traditional way, as a spread bet uses leverage. Leverage means that when you place a bet equivalent to buying, say, £1000 of shares, you might only need to put up a deposit - also known as margin - of 5%, or £50, rather than the full sum. You can find out more about leverage in the 'Orders, execution and leverage' course.
However, it's important to remember that your potential loss is the same whether you trade the underlying shares or place a spread bet on them. In the example above, if the worst happens and the share becomes completely worthless, your maximum possible loss is £1000 in both cases.
Lesson summary
- When you spread bet on a share, you bet a certain amount of money on every point of movement in the price
- This unit of change of the share price can differ in certain currencies, so be sure to check with your provider first
- Your deal will normally be in GBP, meaning you won't have to convert any profits or losses
- When you spread bet, the cost of dealing is included as part of the spread
- Spread betting is free from capital gains tax and stamp duty
- As you never actually own the shares, spread betting enables you to profit from falling markets as well as rising ones
- Because spread betting is a leveraged product, you can put up a fraction of the total cost of the shares and gain the same exposure
