What is spreadbetting?

Profits gained from spreadbetting are tax-free – but the risks are high and potential losses unlimited

An investor saves for the long run. By contrast, a trader looks to profit from short-term market movements. This makes trading far riskier. An investor can buy a promising stock with good ‘fundamentals’ and sit on it. But for a trader, timing matters. They have to pore over news reports, and price charts for promising entry points, and need clear exit strategies.

For private investors, the easiest way to start trading is to open a spreadbetting account. With spreadbetting, you bet a certain amount of money per ‘point’ on a given market (typically £1 minimum, though some providers offer smaller bets). A ‘point’ represents anything from a point on the FTSE 100 index, to a small shift in the value of the pound. You can bet on prices falling (known as shorting) as well as rising.

Say you think the FTSE 100 will fall. Your provider quotes a price of 6,600.5-6,601.6. This is the spread. So you sell the spread at 6,600.5 at £1 a point. If the market then fell to 6,580.1, you could close the bet, and make roughly £20. If it went the other way, you’d be down £20. And if it shot up to 6,700, say, you’d be down around £100. To avoid being caught out, you should set a ‘stop loss’, which will automatically close your bet at a certain level.

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Advantages of spreadbetting include the fact that profits aren’t taxed (because it’s seen as gambling), and it allows you to bet on a wide range of markets with a small pot of capital. But remember that most spreadbetters lose money in the long run, that losses are potentially unlimited, and – like other forms of gambling – it can be extremely addictive. So before you consider trying your hand, make sure you have a trading plan – and stick to it.

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