Spread betting vs share dealing

• Share dealing takes a longer-term approach and involves taking ownership of the shares, whereas spread betting takes a short- to medium-term approach, speculating on the price movements of shares without taking ownership of them.
• In share dealing, a trader has to pay the total amount for the share/s upfront.
• Spread betting is traded through leverage, where a trader only has to deposit a small amount of capital called margin.
• Spread betting is tax-free, with a trader not having to pay stamp duty or capital gains tax on profits earned.
• In share dealing, a trader has to pay stamp duty because they take ownership of the share, and they also have to pay capital gains tax on profits earned.
• In spread betting, a trader can go short and long in the market, while in share dealing, a trader can only go long.
• Spread betting offers access to various financial markets such as forex, indices, stocks, and more, whereas share dealing traders are limited to stocks and ETFs.

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

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

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

Spread betting

Spread betting is a derivative product that involves placing a trade on the future price movements of an underlying asset without taking ownership of the asset. You can place a trade on both rising and falling market conditions by implementing various different trading strategies available.

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 always 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, such as overnight fees. This means if you keep your trades open for longer than a day, you’d be subject to paying such fees.

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. That said, it might be worth checking with a tax advisor for clarity on your personal situation.

Share dealing

Share dealing, also known as traditional investing, is used by traders who take a long-term approach to the market. Share dealing involves buying shares from publicly traded companies with the hopes of the share price increasing and selling them 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 have 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 certain shareholder rights. One of those could be dividend payouts - if a company agrees to such payouts.

Spread betting vs share dealing in detail

If you want to focus mainly on trading shares, 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 that you could sell your shares for a profit later on. 

With share dealing, you take full ownership of the number of shares you 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.

The second way is through 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 share 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 high level of risk, so trade with caution while having a good risk management strategy behind you.

Example of spread betting on shares

Spread betting allows traders to take positions on shares without actually buying them outright. For instance, if the spread betting quote for Vodafone (VOD) is £80 to sell and £82 to buy, it’s a bit wider than the market price. To match the exposure of buying 50 shares at £82, the position value would be £4,100. In spread betting terms, that translates to a £50 per point stake, which means your exposure is just like owning the actual shares.

What sets spread betting apart from traditional share dealing is that it doesn’t involve commission or stamp duty. Plus, you only need to put down a margin deposit, so you’re not tying up the full position value right away. With a 10% margin, you’d set aside £410 from your account to open a spread bet that controls a £4,100 position in Vodafone.

That said, it might be crucial to keep the risks in mind. Losses on spread bets could go beyond your initial margin deposit since the position is open to the full value of the underlying shares. This makes managing risk a top priority when you’re using leverage.

Also, be aware that there might be extra costs, like overnight financing charges, if you hold a spread bet beyond the trading day. These holding costs could vary based on the market and how long you might keep the position open.

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 share value 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 possible profits or losses will be calculated based on the total value of £2000. 

As you can see, spread betting can magnify both your potential profits and losses when trading with margin.

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 (ask) and sell (bid) 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. A broker structures their commission in two ways: it can either be an amount per trade or as a percentage of the entire trade. That said, we don’t charge any commission fees at Trade Nation.

Shorting

Shorting a stock means selling 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 significant losses.

What you can trade

In addition to the points mentioned at the start of the article, there’s one more major difference between spread betting and 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.

Spread betting allows you to trade all available markets from one account. Share dealing works the same way, giving you access to every stock and ETF through a single account.

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

Why you might want to spread bet

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

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

Why you might want to invest

Share dealing might be for traders/investors looking to buy and hold shares in the longer term to build up their portfolio. They generally don’t focus on a wide variety of markets; instead, they mainly focus on various stocks and ETFs.

They also don’t have access to leverage when share dealing because they’ll need to pay the full value of the shares upfront. Lastly, there is the added benefit of earning dividends if the listed company agrees to such payouts.