For my day trading, I use a financial spread betting company.
Don’t get bothered by the word ‘betting’; it could quite easily be called financial spread trading. However, putting the ‘betting’ word in there qualifies for no tax (under the current rules).
My opinion on why no CGT, stamp duty or explicit trading commissions:
- It is well-known that most (and I mean most) people lose at financial spread betting. It’s not the spread betting that people fail at per se, it’s trading in general and particularly day-trading.
- Therefore, if financial spread betting had a tax, then the vast majority would be claiming tax offsets for their losses.
- Spread betting companies, on the other hand, make money (they operate like the casino) and the government is better off leaving the pundit who is attracted to and enjoying tax-free trading (losses) and taxing the profitable companies.
Financial spread betting is a derivative based trading which merely means that we don’t own the physical product; this does give us the advantage (not necessarily always an advantage) of being able to buy, go long, or sell, go short.
We also, unlike an ISA trade, don’t pay a fee for our trades. (I’m considering short-term trades from a DFT here). However, we do pay a spread. A spread being the difference between the buy and the sell.
It might be noticed in my ‘algorithm to trade by’ page that I make repeated reference to the spread – in particular, half-spread. The beginner doesn’t fully appreciate the importance of managing the spread. Furthermore, both the beginner and the intermediate, mainly if the latter drops into the dip, don’t fully understand the importance of managing margin and leverage.
- On selecting a spread betting company probably my most significant criteria is the tightness of the spread.
- A spread of, say, 2.5 pips for GBP/JPY is not a lot when we are trading at the minimum of £1 per pip. (As an aside, the amount per trade or reward/risk measurement has a consistent potential loss per trade).
- If we entered a trade and exited immediately then for the £1 per pip example this would cost us £2.5.
- Okay, that sounds very reasonable mainly as the average ISA has an ‘in/out’ trade cost of £24. (An ISA also has a spread, but let’s keep it simple)
- An expert’s (retailers) account may take them to the region of £60 per pip. An immediate ‘in/out’ in this example would cost £150. And they wouldn’t want to do that too often.
- So, as we can see spread is a definite factor in financial spread betting; in my day-trading, I measure to 0.1 of a pip and spread included in my measurements.
The real benefit of spread betting is leverage – for the expert at least who has learnt how to manage leverage and margin. The beginner, and often the intermediate trader, will misuse leverage (only having to commit 1% to 10% of funds to a trade). There is an enquiry ongoing to protect the inexperienced trader by a substantial reduction in leverage allowed. The effect of which will probably kill financial spread betting as an attractive trading vehicle for the expert.