Special Feature
pros 1. Cheap borrowing As we touched upon at the outset of this piece, one of the main benefits of spread betting in shares whilst interest rates are currently at almost zero is that the borrowing cost is exceptionally low and so financing the position relative to purchasing the stock is almost negligible. The additional bonus is that the financing rate is much lower than almost all private individuals would be able to borrow at in their own capacity.
2. Guaranteed stops We explore this aspect of spread betting further in our feature entitled “Stop Start” on page 20. But simply, there is not a stockbroker in the land (certainly not that I am aware of) that will take on the risk of a position falling through a stop level. That in itself is a very powerful incentive to spread bet a stock, particularly risky ones, even though the stops have to be a minimum 10% away. When things go wrong in stocks, 10% can be gone in but a blink of an eye! The other issue with guaranteed stops is that most spread bet providers will allow you to move them around (subject to the minimum 10% distance from the prevailing market price) and so you can lock a guaranteed profit — again I know of no stockbroker that offers such a facility.
3. The Ability to go “short” Take a look at the Trading Manuals page on our website in order to receive a FREE e-guide which details the basics of shorting and that was written by ourselves and our old “friend” Mr Cawkwell, aka Evil Knievil. Very few stockbrokers will allow retail investors to go “short” stocks as the mechanics of actually borrowing stock from an institutional holder is not straightforward and so this facility is generally the preserve of hedge funds and larger institutions. A spread bet account provides this facility.
4. Leverage capacity This links with point 1 above in that the borrowing facility is the reciprocal of the margin rate. For example, if you have a “blended” margin rate of say 20% and you deposit £5,000, then your borrowing capability is £25,000 (£5000 being 20% of £25,000). The margin rates offered by many spread bet firms are very generous. In our opinion, however, you should dial back your leverage from that offered — a bit like the pudding at a dinner — just because it’s offered doesn’t mean you have to eat it — it can make you sick!
5. Completely Capital Gains tax free This aspect alone is the real clincher for me. To be able to trade without the requirement to submit a cumbersome CGT return at the end of the year is fantastic. Of course, should you make a loss then it’s a bit of a bummer. Similarly, if your Capital Gains are less than the annual allowance of £10,600, then it is a moot point but, for the larger traders in particular, spread betting is a real attraction on this tax aspect alone, quite aside from the other attributes. It also pips CFD’s, in this respect, which are still CGT assessable.
6. Dividend receipt the same as with shares and higher for higher rate tax payers Another of — perhaps the worst prime minister ever — Mr Gordon Brown’s legacies, was his abolition of the dividend tax credit for pension funds and non tax payers.
8 | www.financial-spread-betting.com | November 2012