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Author: Alex Ola Article source: http://www.articledeshboard.com/. Used with author's permission.
What is financial spread betting?
Consider this scenario: You have been trading the financial markets for a while and you have developed a good knack for it. You make decent returns on your trades but you have been acutely aware of the fact that for every pound or dollar of profit that you earn on your trading, you are liable for capital gains tax that, in the UK, could be as high as forty per cent (40%) depending on whether or not you are a higher-rate tax payer. My experience suggests that most successful traders are indeed higher-rate tax payers so that means writing a cheque for 40% of your trading profits to the Treasury every year!
Now, it is worth noting that what you actually trade (be it individual equities or derivatives) is irrelevant to this scenario. So long as you book trading profits, you are eligible for capital gains tax.
Enter financial spread betting.
Now, consider this alternative scenario: you conduct your pre-trade analysis as usual and place your traders in virtually the same way as you would typically do. But this time, you change your trading instrument and rather than trade options or futures on a particular stock or stock market index, you simply trade another derivative of the stock or index. This is essentially what financial spread betting is.
Basically, a financial spread bet is a derivative instrument that mimics the price action of the underlying financial instrument, such as individual stocks and shares, commodities, various currency pairs, stock market indices, and government bond benchmarks. The unique attraction of spread betting is the fact that profits are free of capital gains tax. Of course, this is irrelevant if you have no trading profits to protect. But for those who earn substantial returns on their investments, the ability to keep a further 40% of those returns is certainly attractive.
This tax-free feature has led to the rapid rate of growth that spread betting has enjoyed in the United Kingdom over the last five years. Financial spread betting is now the number one derivative instrument used by private traders in the UK and the popularity is also widespread in places like Australia where spread betting is also legal.
That brings me to the primary downside of financial spread betting at this point in time: legality.
Your ability to spread bet legally depends on the country in which you reside. Financial spread betting is not legal everywhere so it is worth checking out the rules in your own country before going ahead and opening a trading account. Indeed, most reputable spreadbetting brokers would not open accounts for residents of countries where the activity is not permitted.
For more extensive insights and additional information on financial spread betting as well as free research on spread betting opportunities, please visit www.spreadbettrader.co.uk
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