While there are lots of benefits associated with spread betting, such as the potential for earning high amounts of tax-free profits, there are also several important risks you should be aware of. To get an idea of how spread betting can be bad for your finances, have a look at this report on how a teacher ended up losing much more than he earned in a year through spread betting. So while it may seem like just a form of trading, it’s very important that you understand the risks associated with it.
You can lose a lot more than you bet
The biggest risk when it comes to spread betting is that you can lose a lot more than the total amount of your initial investment. If you’re purchasing traditional shares, you won’t lose more than the amount of money you spent on acquiring those shares. Even though the initial deposit you place is a lot less than your position’s full exposure, if prices change against your spread bet, you could end up losing as much as the total amount of your full exposure. While gains can be greatly magnified by leverage, so can losses; you could win much more than your initial bet, but you can also lose a lot more than your initial bet. It’s suggested that you only risk money that you can afford to lose.
It’s technically a form of gambling
Spread betting is actually classed by UK tax laws as a form of gambling, as mentioned here on spread betting in The Times. One good thing about this classification is that profits you make are free from taxation, however the fact that it’s classed as a form of gambling means that, technically speaking, you’re more likely to lose than you are to win. Also, it wouldn’t have been classed as a form of gambling if there wasn’t some level of addictiveness associated with it.
There’s no relief for losses
As previously mentioned, any profits you make from spread betting aren’t taxed. What this also means is that you won’t get any relief for losses you might make. It’s therefore strongly recommended that you work out how much you can afford to lose, because if you do incur losses, you won’t get any help covering them.
Market volatility
Spread betting markets tend to be very fast-paced and can fluctuate very quickly. While you could earn a lot of profit in a short amount of time, you could also lose a lot of money in a short amount of time. In short, spread betting is generally one of the riskier forms of trading because of the volatility and unpredictability of the markets.
You don’t own anything
When spread betting, you don’t actually own any of the assets you’re trading on. Because of this, you have no active role in the market, you don’t have any sort of impact on the price of the asset and you don’t have any voting rights.
So while spread betting does have its advantages, it’s not without its risks. Fortunately, spread bet sites understand these risks and offer numerous ways to protect you and your finances as much as they can. Place a spread bet with CMC Markets and see what measures are taken to make your spread betting successful.
Kidal Delonix is a contributor to Mr. Hoffman's blog. The views and opinions are entirely his/her own and may not reflect Mr Hoffman's views.
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