What is Financial Spread Trading?
Financial Spread Trading, sometimes known as financial spread betting, is one of the many ways you can trade on the global financial markets. Place a bet that the market will rise, or alternatively, that the market will fall. If you are correct and the market moves in your favour, you will make a profit of your initial stake multiplied by each point that the market moves in your favour. If you are wrong you will make a loss of your stake multiplied by each point that the market moves against you.
Financial Spread Trading carries a high degree of risk to your capital. Losses can quickly and substantially exceed your initial investment and you may have to make further deposits. Financial Spread Trading is not suitable for all investors. You should fully understand the risks and seek independent advice if necessary.
What is the ‘Spread’?
The "spread" in the phrase spread trading refers to the difference between the Sell (Bid) and Buy (Ask) price quoted by a spread trading company. This price is calculated by adding additional points around the live (or the estimated future) market price of a financial product. For example, if the FTSE is trading at 5000.5 our quote might be 5000-5001.
What are the tax benefits?
Spread trading is a highly adaptable trading tool. The main tax benefits of spread trading are all profits are free of Capital Gains Tax and there is no stamp duty to pay. You should be aware that, whilst profits made from Spread Trading are not subject to Capital Gains Tax (CGT), you are unable to offset any losses against capital gains for CGT purposes. Please note the tax treatment of these products depends on the individual circumstances of each customer and may be subject to change in future.
Bull or Bear?
One of the advantages of financial spread trading is the opportunity to short (or sell) the market. You can therefore profit from both rising and falling markets.
You can use Financial Spread Trading to hedge your existing share portfolio. For example, if you have some shares which are decreasing in value in the short-term, you could 'Sell' the value of the share using a sell trade and possibly make a profit to counter-balance any decrease in the value of your shares that you hold.
Stake Size of Your Choice
Financial Spread Trading also allows you to trade in sizes smaller than those usually available in the underlying market.
Trade in One Currency
Financial Spread Trading allows you to trade in one single currency as the profit or loss is based on the number of points movement in the underlying asset price.
Trade on Margin
Financial Spread Trading allows you to trade on margin, which means you need only deposit a small percentage of the full value of your trade leaving your excess capital to continue working hard elsewhere.
This ability to leverage means that Financial Spread Trading can carry a high degree of risk to your capital, consequently losses can quickly and substantially exceed your initial investment. You may lose more than your initial investment and you may also need to make further deposits. Financial Spread Trading is not suitable for everyone. You should therefore ensure you fully understand the risks involved and seek independent advice if necessary.
In addition to the Margin Requirement to establish a position, if your position moves against you, you may need to make further deposits. In the event of market gapping your order may not be filled at the level you requested which means you may lose more than your initial deposit. It is important to understand that you can make or lose much more than your initial deposit, unless you use a Guaranteed Stop Loss order (a premium is charged for this service). When you hold an open position, the minimum deposit level must be maintained at all times otherwise your trade will be closed out with an automatic stop loss. However, you can still potentially lose more than your initial deposit unless you have chosen to use a Guaranteed Stop Loss order.
How does Financial Spread Trading work?
If you hold a position overnight you may be charged. Take a look at the TD Financial Spread Trading FAQs to find out how overnight financing is charged.
Please remember that Financial Spread Trading is designed for active traders and involves leveraged transactions. This means that you only deposit a fraction of the full value of the trade. Consequently losses can quickly and substantially exceed you initial deposit and will require you to make further, possibly intraday, payments.
Financial spread Trading should only be considered if you have significant investing experience and knowledge, a thorough understanding of the risks involved and if you are dealing with money that you can afford to lose.
If you are in any doubt about the suitability of this product then you should seek independent financial advice.