Spread betting vs Share dealing

Spread betting and share dealing involve taking a position in the financial market to profit from future price movements.

As mentioned above, one of the key differences is that with share dealing, you’re taking ownership of the stock, and with spread betting, you don’t. Instead, you’re only speculating on the price movements of said stock.

Let’s take a look at both spread betting and share dealing in more detail below.

Spread betting

Spread betting is a derivative product which involves placing a trade on the future price movements of an underlying asset without taking ownership of the asset. You are able to place a trade on both rising and falling market conditions.

Spread betting also allows traders to participate in the market through leverage. It enables them to open a larger position by only depositing a small amount of capital, known as margin. You’d place a bet, known as a stake, through an amount per point of price movement.

And whichever way the market moves, you’ll either make a profit or a loss. The profit or loss is calculated by the number of points the market moved multiplied by your initial stake.

Another factor regarding leverage is that the profits and losses you could obtain are based on the entire size of the position and not just your margin amount.

With that in mind, it might be essential to have a solid risk management plan in place.

Spread betting is more popular among short to medium-term traders looking to profit from short-term price movements. 

However, that doesn’t mean you can’t use spread betting for a longer-term approach.

Something to remember if you decide to take a longer-term approach with spread betting is the costs involved, and the fact that spread bets have a fixed expiration date. The costs are overnight fees, meaning if you keep your trades open for longer than a day, you’d be subject to paying such fees.

There are various strategies which traders could choose to use when spread betting, and if you’d like to learn more about these strategies, you can click here.

As previously mentioned, you don’t own the underlying asset when spread betting, so you don’t have to pay stamp duty or capital gains tax on any profits earned. This makes spread betting tax-free.

Investing

Share dealing, also known as traditional investing, is used by traders with a long-term approach to the market. Share dealing involves buying shares from publicly traded companies with the hopes of the share price increasing to sell it later to make a profit.

Share dealing doesn’t use leverage like spread betting, so you’ll need to pay the entire share value upfront if you want to buy shares. Unlike spread betting, where you could lose more than your margin deposit, with share dealing, you won’t lose more than what you had invested.

Some costs need to be considered, such as stamp duty tax because you own the share/s, as well as capital gains tax on any profits earned.

On the other hand, you get shareholder rights, such as dividend payouts, if a company agrees to such payouts.

Spread betting vs share dealing in detail

If you want to focus on trading shares mainly, there are two ways to go about this. The first is share dealing. 

As we’ve mentioned, share dealing is the buying of shares from publicly traded companies with the hopes that the value of those companies will rise so you could sell your shares for a profit. 

With share dealing, you take full ownership of the amount of shares you may want to buy.

You could also benefit from shareholder rights such as dividend payouts if such payouts are agreed upon. This trading style is more for those with a longer-term approach to the market who want to buy and hold the share/s for months to years.

Now, onto spread betting. This is for those with a shorter to medium-term market approach who want to profit from short-term price movements. In spread betting, you don’t take ownership of any shares; you’re just speculating on the market value of the share/s.

Spread betting also allows you to trade markets that are both rising and falling, which means you could trade shares from companies that are seeing a growth in market value as well as those that are seeing a decline in market value.

It might be good to remember that both spread betting and share dealing involve a level of risk, so trade with caution while having a good risk management strategy behind you.

We’ve covered some essential differences between spread betting and share dealing. Now, let’s take a look at share dealing and spread betting in practice. We will examine four key aspects: margin, cost, shorting, and what you can trade.

Margin

When you use margin to spread bet shares, you won’t need to invest the entire value of a share upfront. This is due to leverage, where you only need to deposit a small amount of capital to open a position at full value.

Let’s say you are looking to open a trade on Vodafone worth £2000, and your broker has a margin requirement of 20%. Now, because of the margin, you won’t need the full £2000 in your account; you’ll only need £400 in your account to open the position.

Now, with share dealing, if you want to open the same position on Vodafone, you’d need the full amount of £2000, plus commission and other costs, as you are taking ownership of the stock.

In both cases, the profits or losses that can occur will be calculated based on the total value of £2000. 

As you can see, with spread betting, your potential profits can be magnified with margin, but so can your losses.

Cost

Now, let’s look at the costs involved in spread betting and share dealing when you open a trade. With spread betting, you won’t have to pay commissions to open a trade. That cost is already calculated into the spread. 

The spread is the difference between an asset's buy and sell price. That is one of the ways a broker makes its money.

That’s not all, though; if you decide to keep a trade open overnight, you’ll have to pay overnight fees.

Now, share dealing has a much tighter spread on trades, but you’ll need to pay a commission. The commission is an amount that a broker charges in order to open the position on your behalf. There are two ways a broker structures their commission; it can either be an amount per trade or as a percentage of your entire trade.

Shorting

When it comes to shorting a stock, it means that you sell the underlying asset to potentially earn a profit. This is useful if you think a bear market might be occurring soon. 

You could short (sell) the stock when the price starts falling, which could lead to a profit; however, if the market starts rising, you’ll make a loss.

This is particularly useful in spread betting because it's a derivative product, and you're just speculating on the price movements of an asset.

With share dealing, shorting a market is a bit more complicated because it involves having to go through a process of borrowing the share/s. But not just that, you could end up experiencing a short squeeze. 

This means that when there’s a lot of selling pressure on a particular share, instead of the price falling, it shoots up, which could result in big losses. This means that when a particular share starts seeing increased selling pressure rather than continuing to fall, it shoots up, which can result in big losses.

What you can trade

Apart from what we mentioned at the beginning, this is another big difference regarding spread betting vs share dealing.

With spread betting, you have a variety of financial markets to trade, including forex, commodities, indices, bonds, ETFs, shares, and more. 

Whereas in share dealing, you can only trade the stock market and ETFs. And while that still gives you access to hundreds of different stocks and funds, you’re limited to only those two markets.

You can access all those available markets in spread betting with a single account. The same is true with share dealing; you only need a single account to access all the stocks and ETFs available to trade.

The choice between spread betting or share dealing will ultimately come down to personal preferences such as your trading goals, trading style, and risk management plan, to name a few. However, to give you a better overview, let’s recap everything we've covered in the article.

Why you should spread bet

Spread betting is for traders with short- to medium-term trading styles. Spread betting is a derivative product which allows traders to trade various financial markets such as forex, indices, commodities, and more.

It also allows traders the ability to go long and short in the markets with access to trade with leverage.

Why you should Invest

For traders looking to buy and hold shares in the longer term, share dealing might be for them. They won’t have all the different financial markets that spread betting has available, but they can choose from various stocks and ETFs.

Traders won’t have access to leverage when share dealing because they'll need to pay the full value for the shares upfront. However, it could be a way to build a portfolio for the long term while earning dividends if the listed company agreed to such payouts.