Spread betting is so popular in the UK, that traders from other countries should understand it well, too. Spread betting is different from betting and is more of a form of trading. We will discuss the exact reasons why spread betting was introduced in the UK and how it differs from other popular ways of financial trading.
Forex trading taxes – the birth of the UK’s spread betting
Spread betting is a speculation on the financial markets that allow traders to bet on the price movements of various financial instruments such as stocks, indices, currencies, and commodities. When trading financial markets in the UK, traders are subject to a tax called capital gains tax. This tax is applied to profits made while speculating on financial markets. Trading is difficult, and it can become a heavy burden if your government tries to take some of your profits for filling the budget. Knowing how FX trading is taxed may make a huge difference in trading revenues. Deducting an 18% capital gain tax from annual returns will heavily affect profitability.
Because of this, spread betting was introduced in the UK. Since gambling rewards are not taxed, clever brokers introduced another way to enable traders to avoid being taxed if they make any money. Spread betting is an activity similar to gambling. It is recognized as a form of gambling by the law, avoiding the taxes on spread betting profits. Spread is the difference between ask and bid prices. Also, it sounds similar to Forex and stock trading there are substantial differences between the two, and we will discuss them in detail.
Spread betting vs Forex trading compared
In Forex trading, traders will long or short position or buy or sell the asset and wait till the price goes in their direction to close the trade and take the profit. They are not limited by time, and the position may be opened as long as the trader wishes. Spreads are also tighter when it comes to Forex trading. In spread betting, however, the spreads are higher, and traders bet in the direction of the price movement.
The loss or profit is calculated after closing the position by the difference between entry and exit prices, just like Forex trading. But spread betting is not as strictly regulated, and profits can be withdrawn without taxes. Leverage is also higher for spread betting, amplifying both potential profits and losses. We can think of spread betting as a middle ground between trading and gambling, picking the best of both worlds.
In its essence, spread betting is very similar to Forex trading, the difference is very minor, and users just have to predict the market direction. When using spread betting, the trader doesn’t own the underlying asset they are predicting the price of, while in Forex, the trader owns the underlying asset they are trading.
So, basically, the loophole in UK’s tax law gave birth to spread betting, betting on the direction of the price in the future. Spread betting is considered gambling by the law, but is more of a trading endeavor. Numerous studies indicate that spread betting is trading in essence.
Spread betting vs stock trading what to know
Stock trading is a form of speculating on financial markets by buying and selling the shares of the company. A stock trader can not sell stock they do not own. In spread betting, however, traders can bet on stocks, indices, and many other instruments, and they can right away bet that price will decrease. Spread bettors don’t own the underlying asset, they are just betting on its price.
This gives spread bettors higher flexibility and using high leverage they can trade much higher positions than their account size. Most stock trading brokers limit the leverage for stock traders, and it is hard to start stock trading with a small budget. Spread betting doesn’t require a very high budget because of high leverage possibilities. So entry costs are higher for stock traders, but they have lesser risks than spread bettors. High leverage contains higher risks and spread bettors should trade very cautiously not to lose more than they afford.
Key takeaways
- Spread betting is a popular form of financial trading in the UK. It was introduced to avoid getting taxed on trading revenues. While trading revenues are taxed by the UK government, the profits or winning from gambling are not taxed. Spread betting is considered gambling and its profits thereby can be withdrawn without getting taxed.
- Forex trading is very similar to spread betting, the difference is that during spread betting traders will have to predict the market direction beforehand. The profit or losses for spread betting is calculated after closing the position by the difference between the entry and closing prices of the trading position.
- Positions can be held for years when spread betting, just like when trading Forex and other financial instruments like stocks, indices, etc.
In the end, spread betting has taken the best of the trading and gambling worlds and is less risky than gambling and a bit riskier than Forex trading because of its high leverage.
