Benjamin Franklin once famously proclaimed: ‘Certainty? In this world nothing is certain but death and taxes.’

However, although they may not have always been able to avoid it entirely, rich investors have long been able to hire expert tax accountants and attorneys to get round the tax laws and minimise tax liability. Unfortunately, this sort of legal tax avoidance has been the preserve of the very rich and well-connected among investors.

No longer now.

A relatively new investment product originated in the United Kingdom has turned that around in favour of private investors, big and small.

Enter financial spread betting.

In its purest sense, financial spread betting is simply a form of derivative trading, using a derivative instrument (namely, the spread bet) that mimics the price movements of an underlying financial instrument, such as individual stocks and shares, commodities, various currency pairs, stock market indices, and government bond benchmarks.

In this way, you can think of a stock spread bet as a derivative on a particular individual stock. Like standard derivative instruments, the value of the spread bet is based on the value of the specific instrument that it tracks.

For all practical purposes, the pricing is market-determined and driven by the price of the underlying market. Liquidity is essentially guaranteed as most brokers simply hedge positions in the cash market and spreads are relatively narrow.

This form of trading has a number of distinct advantages over conventional stock trading.

The first is relatively straight-forward. In the UK, share trading is subject to stamp duty which is 0.5% of the transaction value. Using spread bets avoids this cost, adding this gain straight to the bottom-line.

A second important advantage is the ease of multi-directional trading afforded by spreadbetting.

What I mean here is that unlike conventional share dealing where the requirements for short selling are particularly cumbersome, using spread bets, one is able to go short of an index, stock, commodity or currency in much the same way that one is able to go long. There is no added requirement or consideration. To go short, a spread bet trader simply reverses the order of trading transactions, selling first and then buying back at a lower price (if the market moves in your favour).

A big attraction of spreadbetting is the fact that under current legislation in the United Kingdom, profits are free of capital gains tax. Of course, this is only of value to you if you have trading profits to protect from the tax man in the first place.

The editor of the ’spreadbettrader’ website (see author information below for link to spreadbettrader), a professional spread betting analysis website provides excellent assessments of profitable trading opportunities for earning substantial spread betting profits for those who are interested.

It goes without saying that for those who earn substantial returns on their investments, the ability to keep a further 40% of those returns (from potential tax savings for higher-income tax payers) 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.



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One key advantage of spread betting is that a wide variety of markets are available to trade on. In many cases this form of investment can allow investors to gain exposure to markets that are traditionally difficult to gain access to.

Below is a brief explanation of some of the more popular spread betting markets:

Indices

Indices represent the combined share value of a number of companies on a particular stock exchange or sector eg the FTSE 100 and Dow Jones are popular indices for investors who like to spread bet on the UK and US markets.

Foreign Exchange Rates

Foreign exchange rates, or forex rates as they are often known, are a measure of the relative worth of global currencies.

In particular, it is possible to spread bet on the comparative value of two different currencies in a ‘forex pair’ ie forex spread betting.

As an example, if the British Sterling / US Dollar forex pair was trading at $1, this would imply that the Pound was of equal value to the Dollar. However, if the pair was trading at $2 then this would imply that one Pound was worth two Dollars. At the moment that rate is closer to $1.60.

Foreign exchange markets are often extremely volatile as a result of the fact that they are heavily influenced by economic and political pressures, especially relating to specific information about the state of particular economies.

Whilst not traded as much as Indices, forex pairs remain a major part of many investment portfolios and are usually the second most traded spread betting market.

The most traded forex pairs are the Majors. These are currency pairs that represent particularly strong economies and are highly liquid markets. They include:

Euro / Dollar

Euro / Sterling

Euro / Yen

Sterling / Dollar

Sterling / Yen

Dollar / Yen

You can trade these with firms like Financial Spreads and Tradefair.

Stocks / Shares

Stock / share trading in companies is the archetypal form of financial investment. Traditionally a trader purchases stocks/shares, becoming a share holder in the company, and hopes that the value of the stock will improve.

With spread betting this ‘purchase’ of shares does not take place. Yet stock / share spread betting still makes up one of the most heavily traded markets. With financial spread betting you are only speculating on the future price of the share.

Commodity Prices

A commodity is a product whose value is determined on a basis of supply and demand, often without differentiation for source or even quality.

Two of the best known, and most traded, examples are crude oil and gold, however, the term commodities not only covers metals and fuels but also ‘softs’ such as sugar, soy and coffee.

As with all spread betting markets, you can speculate on the market to go or down. If you think the price of Gold will rise you spread bet on it to go up. If you think the price of a barrel of oil will go down you can bet on it to go down.

Note though that spread betting carries a high level of risk to your funds. You can lose more than you initially invest. It may not suit all investors. Only speculate with funds that you can afford to lose. Ensure you understand the risks and seek independent financial advice if and when necessary



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The art of speculating on asset prices has been around for centuries. From the days of the Dutch Tullip to the more recent internet stocks boom and bust, people have been willing and able to place bets on the outcome of financial events and fluctuations in the prices of stocks and shares, bonds, currencies, and the various commodities including gold and oil.

While the actual process of buying and selling financial instruments remains largely the same as it has always been, the instruments available to investors are constantly changing. Indeed, such changes or financial innovations as they may be referred to have been the bedrock of advanced economies with sound financial institutions.

In recent times, one of the most notable and innovative products to enter the private investor arena has been financial spread betting. This derivative instrument originated in the United Kingdom in the 1970s, and having started out as the preserve of financial wiz-kids, it has become a mainstay among private investors from all walks of life.

Essentially, a financial spread bet is no different from a derivative that moves in line with the price action of the underlying security, be that stocks and shares, commodities, various currency pairs, stock market indices, and government bond benchmarks.

The major advantage of financial spread betting as it is currently structured is the fact that profits are tax free. Of course, as the spread betting brokers are always quick to point out, tax laws are subject to change. But for now, the exemption from capital gains tax which can be as high as 40 per cent in the UK and Ireland makes this a potential lucrative and attractive vehicle for profitable short term traders.

The key word here is ‘profitable’ since freedom from capital gains taxation is irrelevant if you have no trading profits to protect. But for those who earn substantial returns on their trades, being able to keep a further 40% of returns is certainly a big advantage.

This tax-free attribute has meant that spread betting has enjoyed tremendous success and popularity in various jurisdictions including the UK and Australia.

Of course, despite its many advantages, spread betting remains a specialised activity that involves a high level of risk and, as a trader you may lose more than your original stake due to the leverage effect. Consequently, it is not suitable for everyone.

Moreover, spread betting is not always legal depending on your country of residence.



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