Differences between spread betting vs share dealing and the pros and cons of each.
The most significant difference between them is that in share trading you will actually buy and own the asset, share or stock that you are trading in. With share trading you have the ability to then sell them for a profit or loss at a later date depending on the movement in value. With financial spread betting, you never actually own the share or commodity in any way, nor have any right to ownership over it. It is a form of market speculation, where the trader will speculate on the movement of the asset, as to whether the value will increase or decrease.
What is traditional share trading?
As previously discussed, in traditional stock trading, the trader actually owns the stock. For example, if a new company was formed, for example Company XY, then the trader could invest in the company by buying shares. The shares in the company are purchased, meaning that you hold stock and therefore partial ownership in that company.
When dealing in shares, you will buy the stock and wait for an increase in share value, when it reaches a higher value and you wish to then cash in on the profit, you will then sell at a higher rate than you bought the stock. This is how the profit is acquired. Consequently if the value of the stock decreased in value you would make a loss.
When you buy shares, if buying in the UK, you usually are required to pay a tax or duty of 0.5% on any transaction related to holding shares. This tax applies to buying shares whether they are done electronically or not. When you sell on shares or make a profit from them, for example dividends, you are also required to pay Capital Gains tax.
The pros of traditional share trading
-You own the share or commodity.
-It is easier to assess the market, and to gauge when to sell you shares to gain profit.
-In general, share trading is seen as a long term investment strategy.
The cons of share trading
-You have to pay both Capital Gains tax and Stamp Duty Reserve Tax on any shares transactions / deals.
-Shares rise and fall in value and it can take a long time to make a profit, so are not always suitable as a short term investment strategy.
-There is the risk of potentially losing your money should the company fail. Any investment you made in the company would be lost.
If you would like a list of top share dealing companies, read our comparison of share dealing brokers.
What is spread betting?
The first thing to note, unlike traditional share dealing, as detailed above you do not own the actual share, nor have any right to ownership on the commodity being dealt in. This means you do not own any stock in the company you are spread betting on.
The 4 Steps to spread betting
The pros of spread betting
-If you implement a guaranteed stop loss / limit order you know how much your profit or loss could be, if you make a profit then there is no UK tax.
-You can close the trade at any time, without being dependent on if you are making a profit or a loss.
-You can trade on margin which means you only have to pay a fraction of the actual cost of trades.
The cons of spread betting
-You have to pay an initial deposit to cover any potential losses.
-If you predict the rise or fall incorrectly, you losses can exceed you deposits.
-Spread betting is not suitable for long term investment
The following are top rated and regulated brokers that offer spread betting: ETX Capital , Core Spreads and Spread Co.
If you would like to see our full list of the top spread betting providers, read our comparison of regulated spread betting brokers here.
As with any investment, your capital is at risk and there is the possibility you could lose money.