How spread betting compares to traditional market investing

Traditional investment opportunities, such as stocks, have been around for a long time. For this reason, they are often the first to be mentioned when people talk about financial investments, even among locals in Abergavenny. However, today’s market has grown far beyond the shares and dividends model that many investors are accustomed to. There is a broader range of modern trading options, some of which offer greater flexibility, better tax policies, and alternative ways to capitalise on market movements. Spread betting is one such investment, and this piece will shed some light on what it entails and how it compares to the stock market as a reference point for traditional assets.

Spread betting is a form of speculative trading that enables individuals to profit from price movements in financial markets. It involves betting on whether the price of a particular asset will rise or fall, without owning the asset itself. For example, if the FTSE 100 index is trading at £7,502 and you bet £5 per point that it will rise and it later moves up to £7.540, you earn £5 for each of the 38 points gained, which is a profit of £190. However, if that market falls instead, you lose the equivalent of the same amount you would have earned. Traditional stock investing, on the other hand, involves buying shares directly and gaining ownership of a portion of a company. When trading stocks, most retail investors purchase the assets outright using their own capital, meaning no leverage or betting is involved unless they specifically use a margin account.

In short, with stocks, you gain ownership, earn dividends where applicable, and build long-term wealth through gradual market appreciation. The risk here is typically lower because, with traditional investing, your gains and losses are limited to the actual amount you invest, and nothing is leveraged. You gain what you gain, and you lose what you lose. With spread betting, however, the opposite is true: leverage can amplify both gains and losses, meaning a slight market movement can result in a much larger profit or loss than your initial stake.

The risk threshold of these assets isn’t the only thing that differentiates them. To understand how they compare, we’ll examine them based on other factors, such as tax treatment, leverage, and market flexibility.

The tax system is a significant advantage for spread bettors because it differs significantly from traditional stock investment policies. Spread betting offers unique tax advantages in certain jurisdictions, and the UK is one of them. The significant positive aspect of this case is that the investment is typically exempt from Capital Gains Tax (CGT). Typically, UK stock traders are subject to CGT on any profit made from selling shares. For the 2024/2025 tax year, gains on shares are at 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers. If you’re investing in spread betting, it automatically means you get to evade this fee. This is mainly because spread betting is classified as a form of gambling, rather than an investment. Because no asset is purchased, there is also no stamp duty. Generally, profit is not taxed as income unless it becomes your primary source of income or a professional activity.

One of the most noticeable differences between spread betting and traditional market investing is the level of flexibility each approach offers, both in how you trade and what you can access. Spread betting is designed for versatility, allowing you to speculate on a wide range of markets, including shares and indices, commodities, currencies, and crypto assets. Aside from this, there is also the significant advantage of being able to go long or short with ease. Spread betting also offers granularity in position sizing. You can stake as little or as much as you want per point of movement, allowing precise control over your exposure. The overall flexibility of not needing to own an asset, being able to control your leverage, and applying a spread betting approach across multiple markets is a significant advantage, which could also improve your profit potential.

Leverage is another defining difference between these investments. It is the practice of holding a position larger than the amount of capital you commit when trading. With this advantage in spread betting, you only need to deposit a fraction of the total position value, known as margin. Using the FTSE 100 example we referenced earlier, you might only need a few hundred pounds as margin to open a position of that size. Traditional stock investing, on the other hand, requires you to buy the full value of the asset, rather than deposit only a few per cent. It’s essential, however, to know that leverage works both ways. If the market moves against you, it’s possible to lose more than your initial deposit.

Deciding between spread betting and traditional stock investing ultimately comes down to several factors, including your financial goals, risk tolerance, and experience. Because of the leverage risks associated with spread betting, it is a safer option for experienced investors. Before you choose, carefully assess your objectives and experience, and understand how each approach works.