Spreadbetting compared to holding stocks and shares
|Item||Parameter||Stocks & Shares||Spreadbetting||Notes|
|1.0||Value||Has an initial money value because it is an asset||No money value because it is not an asset.||The idea of making money from something that has no actual value may seem strange. The money has value. But there is no sale of an asset. It’s similar but different to buying chips at a casino.|
|1.1||Future value||Future value depends on market value||Has no future value – as it cannot be sold on a market.||The issue is of course, marketable value. Stock/Shares have marketable value. Spreadbet trades have none on the open market.|
|2.0||Transferability||Has a marketable or transferable value||Cannot be marketed or transferred.|
|3.0||Purchase||Are purchasable||Not purchasable in the sense of an asset.|
|4.0||Gearing or Leveraging||None.
£10 buys a single share sold at £10.
e.g. Ignoring commission, for 5000 shares of Vodafone at
a price of £1.79, you pay 5000 x £1.79 = £8950
If you sell at £1.84 per each share, our profit is 5000 x £.05 = £250
|By example to make a spreadbet (SB) you’d say put up a 5% margin on same value of Vodafone shares i.e. only need to put up 5/100 x 8950 = £447.50 as a deposit. That ‘deposit’ (also roughly equating to ‘margin’) would cover £50 per penny movement in price (the size of your bet).
If price changes by £0.05p you make (or lose) 50 x 5 = £250.
So instead of putting out £8950 in the case of buying 5000 shares, you’ve risked £447.50 and profited the same £250 (if price moved in your favour).
[Margins are set and told at time of placing a stake].
|The idea of ‘gearing’ (or leveraging) means that you do not need large sums of money to dip into the stock market as it’s traditionally known.
The latter example is very simplified and is not a good one.
But there is a sting in the tail – whilst the money is not actually paid out of pocket covering the ‘margin’ may vary significantly across different shares.
There is also the matter of ‘slippage’ which is not explored here – and there are many other significant risks in SB trades.
Which is better – cannot be decided here as it depends on so many variables.
|5.0||Profits||Profits or losses made on resale – but can only be made by selling at a higher price.||Profits can be made so long as price ends higher or lower than that predicted.||No one to our knowledge has made money on selling losing stock. It is well known that spreadbetting allows for making profits on items when market prices fall.|
|6.0||Nature of profits||Profit depends on margin between selling price and buying price and numbers of shares sold.||Profit depends on the ‘gearing’ ratio and numbers of shares covered in a spread.
||Profits also depend on Taxation. See point 12.0.|
|7.0||Degree of profits||Hinges entirely on price differential between buying and selling price.||Hinges entirely on price differential between buying and selling price. However, gearing means that smaller changes of price of shares for many more shares, can amplify profits (and losses) significantly.|
|8.0||Nature of losses||Losses depend on degree to which future value fall below initial purchase value.||Losses can be magnified by the same gearing that applies to profits.|
|9.0||Duration||May hold value for long periods depending on market rates and can be sold at various brokers.||Hold no marketable value whatsoever for any period of time.|
|10.0||Expiry||No practical expiry of asset.||There is expiry but can be rolled over (at marginal cost).||The mechanism allows for a SB to be held for very long periods, just like a stock so long as it’s gaining value.|
|11.0||Risk||It’s taking a chance – and a risk.||It’s taking a chance – and a risk.||It’s difficult to say which carries greater risk, because with stocks you’re putting out larger chunks of money. But in SB though you put out less you could well lose as much.|
|12.0||Taxation||Earnings are taxable at whatever rate.||Earnings not taxable i.e. tax free (within HMRC rules, in the UK – laws in different countries may vary).||SB is treated as gambling by HMRC, but trading on stocks is not gambling. But in both situations you’re trying to predict a price advantage and get it right.|
Bonds – what they are and their importance
There is much confusion out there about what bonds are. I’ve seen so-called experts getRead More
Conversation with a failed trader
Today I met a chap who is a failed trader. This was a rare opportunity.Read More