Spread Betting

by Mike Newman

Prior to the summer of last year, I considered ‘spread betting’ to be . I was someone who didn’t spend a dime on gambling, or bet on the horses or dogs. Neither would I gamble on the stock . After all, I’m an ‘investor’ - in other words my involvement with the stock market is purely to take money out of it, i.e. to earn my living from my stock market trading profits. No profits, no food on the table, its that simple.

For year’s I’ve always thought of betting as giving money to the . After all, if the bookmakers lost money, they would not have recently been prepared to bid for pitches on racecourses.

But slowly last year, over several months of cursory thought, the penny finally dropped. I realised that my reluctance to get involved with financial spread betting was all due to my hang up with that word – ‘betting’. I opened my first spread betting account in August 2003 and with a profitable year of spread betting behind me, I now realise from practical experience, that trading with a spread betting company, whilst very similar to trading with a stock broker, is much more profitable. The main difference, and its a big one, is that there are no taxes to pay on the profits gained from spread betting! Just you re-read that sentence, whilst thinking of all that stamp duty, tax on and the you are paying if you are one of those who buys things, such as shares, in the hope that your chosen (s), commonly known as bets, will rise in value, after you have paid tax and commissions of course.

I soon realised that the word betting, in ‘spread betting’ is in effect a purely legal term that puts spread betting companies in a different taxable category to stockbrokers. So, unlike stockbroker customers who are taxed on their winnings, all winning and loosing customers of spread betting companies effectively pay a ‘betting’ tax to the Government via a ‘special’ tax on the profits of spread betting companies themselves. Its unlikely that the Chancellor will change the spread betting company tax arrangement because overall the Exchequer is better off as there are more loosing spread betting punters than winners. The advantage to me and the many other winners of spread betting trades is that we do not pay any CGT on our spread betting, nor do we need to report any of this type of trading to the Inland Revenue.

In my experience, unless you know the intimate details of all the companies that you own shares in and you know all their up to date operational, financial and competitive details (not just what you read in old out of date annual reports), then you are just placing a one way taxable bet with your stock broker or fund manager. Why not improve your investment returns by taking, for example, a three way tax free bet so that if the underlying goes up, down or stays still, you still make money. Doesn’t that sound a lot better than a one-way share-buying bet with your normal tax paying broker account?

Not only are spread betting profits tax free, but you do not necessarily have to lodge any cash or any assets with a spread betting company. Amazingly, having checked out your credit worthiness, they will lend you cash to support your trades, totally free of interest and for the life of your account. It is obviously advisable to hold some cash or quickly liquid assets somewhere else in the unlikely event of exceeding the spread betting company’s credit limit. In fact when you open a credit account they will ask for proof of funds of five times the free credit you are asking for. But even keeping some cash on the side has a further plus point because instead of loosing the interest on the cash you would normally use to buy shares, with a spread betting credit account, you will no doubt be receiving at least 5% gross on your cash, lodged in a savings account, in addition to your tax free trading profits - not a bad deal I say!

How closer to the Holly Grail of investing can you get? With spread betting companies, you don’t need to use any of your own money, but you get totally free credit forever and tax-free profits flow relentlessly into your pocket. It surely can’t get any better that this. Oh yes it can! Those lovely spread betting companies also pay you interest on any ‘free cash’ that you happen to leave in your spread betting account - i.e. interest on the profits you have made using their interest free money - that’s what I really call free interest!!!.

OK you ask, what’s the catch? Well, a year on and ‘only’ 74 trades later with just one of the three spread betting companies that I now use, I’m showing a net profit of 248%, i.e. I keep 2.48 times the free money, that they loaned me a year ago and the free loan cash still stays in the account. So far, I can truthfully say, there isn’t a catch, or at least, if there is one, I haven’t found it yet!

Before getting into trading with a spread betting company, I was concerned that because they each set their own prices for all their trades, the prices offered are not supposed to be as good as quoted by a normal broker. Yes, there is some truth in that, but competition between the spread betters is fierce so price differences are generally very small. However, although I sometimes get a 5% better price with a broker, this must be offset by there being no commission to pay on spread betting. And, since all serious investors aim to well exceed the CGT threshold each year, you must take into account that compared to the net of CGT profits with a trade through a normal broker, the same tax free trade with a spread better is at least 30% more profitable, even allowing for the slightly worse prices.

If you are interested in improving your own investing performance, try reading my article on trading options that is available from the Signet web site. I wrote it prior to opening my spread betting accounts, but since I still apply the same trading method to my spread betting accounts as I do to my options accounts, the article applies equally to both spread betting and traditional broker accounts.

Over the last 56 months, which has included ‘9/11’ and the continual market fall in the summer of 2002, my combined spread betting and traditional accounts have returned an average of over 3% per month, net of tax and, most importantly, net of all living expenses. . . . I’ll let you estimate the gross level of return whilst you also work out your own trading performance over both your last 74 trades, and the last 56 months. If its better than mine, which of course applies to many investors, then I suggest you keep doing what you are doing. If its not, and you want to improve your performance, then at least consider taking the ‘easy’ route to simpler and more profitable tax free trading by opening a spread betting account and altering your trading method before your one way share bets gobble up any more of your remaining capital.