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For those who are interested in investing, it doesn’t take long before they come across the term spread betting. So what is spread betting and how does it differ from more ‘normal’ stock market investing? Let’s consider two areas where spread betting and more standard investing completely differ. First we will consider the amount you could potentially lose and then we will consider the tax treatment of spread betting compared to more standard stock market trading.

The amount you could potentially lose

If you have £1000 to invest and you decide to invest this into stocks and shares through a traditional broker, then the maximum amount of money that you could lose would be your initial £1000 investment plus any trading fees you have paid to make your initial trades. It doesn’t often happen that you would lose your whole investment but it is possible.

With spread betting it works a little differently. With spread betting your initial investment is multiplied by the change in the spread, leveraging your initial investment. So let’s say that you invest £10 on a spread betting platform and you think that the Dow Jones Industrial Average is going to rise in the near future, so you place a buy trade to profit from this. Over the course of your trade the spread on the Dow Jones rises by 10 points and you are making a profit of £10 per point of increase. When you exit the trade you will have made a profit of £100. But what if the Dow Jones falls in value instead? Well, if it falls by 10 points then you could find that you have lost £100, more than your initial investment. So this is one way in which spread betting differs to more standard investing. With standard investing, only your initial capital is at risk. With spread betting there is the potential to lose more than your initial capital investment.

The tax treatment of spread betting compared to standard investing

When spread betting, you don’t actually own any of the underlying assets in the same way that you would if you were to buy the shares through a standard online brokerage. As you don’t own any assets, trades made when spread betting are not subject to stamp duty and any gains made are also not subject to capital gains tax. Of course, it is worth remembering that some of the tax liabilities associated with standard share trading can be negated through the use of a stocks and shares ISA.

Here we have discussed just two areas showing the differences between spread betting and standard share trading. We can see from these two examples that with spread betting, there is the potential to lose more than your initial investment amount and we have also seen that the tax treatment of spread betting is different to that of standard share trading as you don’t actually own any of the underlying assets.