THE persistent refusal of Chancellor Gordon Brown to make any commitment to reform Stamp Duty Reserve Tax on share transactions – at 0.5 per cent the highest in Europe – has played a large part in the remarkable growth in popularity of Contracts for Difference (CFDs) and spread betting.
Since, unlike conventional instruments, CFDs (read more about them on http://www.contracts-for-difference.com) and spread bets do not confer ownership of the underlying asset – traders buy or sell the price movement in the underlying equity without ever taking delivery of it – neither is subject to stamp duty. And because spread betting falls within the gaming laws, it is also exempt from Capital Gains Tax.
The other key appeal of spread betting is that, as a margin product, it enables traders to gear up their investments. And because, as a margin product, traders could potentially lose a multiple of their initial stake, spread betting is recommended for use only by professionals, day traders and experienced investors.
But while there are risks attached to spread betting, there are various tools available – such as guaranteed stop losses – that can help manage that risk by, for example, inputting to the system parameters to alert traders to specified price movements.
Another reason for the recent growth in the popularity of spread betting can be attributed to the fact that, in addition to speculating on the underlying equity, investors can trade on the various indices. Indeed, spread betting enables traders to profit from both up and down movements on a wide variety of financial markets, whether indices, individual shares or commodities, such as gold or crude oil.
Unlike fixed odds betting, under spread betting traders don’t risk a certain amount per bet, and there is no fixed profit or loss.
That’s because the profit and loss on a financial spread bet is always open as the trader is betting a stake – usually pounds per point – on the direction of the market.
For example, a trader might expect the FTSE 100 index to rise and so decide to buy it at