Since the early 2000’s financial spread bets have gained remarkable popularity, becoming one of the most popular derivative instruments available in the United Kingdom. Today, we are going to attempt to answer the question of why this particular financial instrument has gained such remarkable popularity, as well drawing attention to some of the instruments cons. The answer can be most easily brought out by comparing financial spread bets to other commonly used financial instruments. An investor with say £10,000 is going to be faced with a multitude of different investment opportunities. Such an investor may opt to put his spare cash into an ISA, s small stock portfolio, or even an investment fund. But none of these opportunities offer the potential returns that a successful spread bettor can make. While the risk factor is much greater with financial spread bets, many investors have been attracted into financial spreading betting by the potentially huge returns to be had.

As a type of financial derivative spread bets give an investor the opportunity to take positions on a number of diverse financial instruments including shares, indices, commodities, bonds and even exotic ETF’s. This gives investors the potential to make significant returns on the price movements of these financial products without owning the underlying physical asset. It is in this way that financial spread betting has vastly increased access to the financial markets, allowing individuals to trade instruments which were once only available to financial investment firms and high net-worth individuals.

Financial spread bets have a long history being initially created by investment banker Stuart Wheeler during the 1970’s, however spread betting only began to catch on with the population at large during the late 90’s. This rise in the popularity of spread betting has in part been powered by the rise of the internet which has made access to global financial markets only a mouse click away. During the late 2000’s there was huge growth in derivative trading in general, with financial spread betting being one of the fastest growing derivative markets. The spectacular growth of derivative trading during this time period can be attributed to the rise of high speed internet, increased market volatility and growing awareness of the potential returns that leveraged derivative instruments can offer successful traders. The spread betting industry has evolved considerably since its inception in the early 90’s with there being many platforms offering financial spread betting to retail customers.

Having properly introduced financial spread betting, we should next evaluate some of the pro’s and con’s of spread betting as a financial instrument. As financial spread betting is a leveraged and high risk financial instrument it may not be suitable to your financial views and I aim to provide the pro’s and con’s of financial spread betting in an unbiased manner.

Pros

  • Spread betting is easy to understand in comparison to other competing financial derivatives. It is often said that financial spread betting is simpler than say CFD trading.
  • Spread betting has relatively small capital requirements with many providers allowing clients to open accounts with a deposits as small as £100.
  • Small upfront costs, with margin requirements being typically around 10%.
  • Financial spread bets give you the potential to make money from both rising and falling markets. An advantage that spread betting has over traditional share trading.
  • Profits from spread bets are tax free (in the UK), unless you rely solely on profits made from spread betting to support yourself. This is due to the fact that financial spread betting is considered a form of gambling.
  • The ability to trade a wide range of different financial instruments from a single account.
  • Extended trading hours and huge range of financial markets means that you can trade 24 hours a day during the week.
  • Spread bets offer the possibility of unlimited profits with only limited losses.

Cons

  • There are certain costs associated with financial spread bets, unlike traditional share trading all spread bets have expiry dates. When keeping positions open beyond their expiring date you incur certain rollover costs.
  • No dividends or interest, but you can benefit from price movements associated with such events or announcements.
  • Losses cannot be offset against capital gains, as can be done with both traditional share investments and with CFD’s.
  • Due to the fact that spread betting is a form of margin trading, it is possible to lose more than your initial deposit. This isn’t a worry associated with many traditional financial products.
  • Spread betting is not geared towards long term investment, due to the various costs involved in keeping a spread bet open for an extended period of time.
  • There is also the possibility of unlimited loses and only limited profits, when taking a short position.

While Spread betting has a number of benefits it also involves significant risk. This significant risk means that financial spread bets are not an appropriate product for the majority of investors. Those looking to engage in financial spread betting should make themselves well aware of the risks involved before beginning trading. If you are unsure whether financial spread betting is suitable for you, seek the advice of an independent financial adviser.

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