What’s the difference between spread betting and share dealing?
The main difference between spread betting and share dealing is that with spread betting, you don’t own the asset you’re trading. When you invest in shares, you buy them and add them to a portfolio. When you spread bet, that never happens.
This is a significant difference, and it means spread betting and investing have some unique benefits that make them suitable for different people. But before we get on to that, let’s take a closer look at how each of them works.
How traditional investing works
Traditional share trading works by buying stock via a broker. Once you’ve bought shares, you own a stake in the ownership of a public company. As the company’s value goes up and down, so does the value of your stock.
To earn a profit, you need to sell your shares for more than you bought them for (including other costs, such as commission). If you sell them for less than you bought them, then you’ll earn a loss.
How shares spread betting works
Shares spread betting works by betting on the price movements of stocks. You don’t take ownership of a stake in a company, you speculate on whether its value is going to go up or down in the future.
Your profit is determined by how much the market moves in your chosen direction, and the size of your bet. If the market has moved in the opposite direction to your prediction when you close your position, you’ll make a loss.
Learn more about spread betting.
How to start spread betting
Interested in spread betting? Get started by following these four steps:
- Open your City Index account. It takes minutes, and costs nothing
- Add some funds so you can start trading immediately
- Find your first opportunity. You can choose from 1,000s of markets
- Open your position
Or if you want to see how spread betting works in practice without risking any real capital, consider opening a trading demo. You’ll get £10,000 in virtual funds to try spread betting our full range of live markets.
Share dealing vs spread betting: key differences
That’s the theory, but what are the differences between share dealing and spread betting in practice? Here are four key areas where spread betting differs to investing: margin, costs, going short and range of markets.
When you spread bet on shares, you won’t have to pay for the full value of your position upfront. You only need a fraction of its cost in your account, known as your margin.
Say, for instance, that you wanted to bet £5 per point on Lloyds Banking Group, which is priced at 48p. The total size of your position is (£5 x 48) £240. But you might only need 20% of that in your account to open the trade.
With share dealing, you’d need to pay the full £240 (plus commission) as you’re buying the stock outright.
With either position, your profits and losses will be based on the position’s full size: £240. So while spread betting can magnify your profits, it will do the same to your losses.
Another key difference between spread betting and share trading is how you pay to open your position.
With share dealing, you’ll pay commission – a charge to your broker to cover the costs of buying and selling the stock on your behalf. This may be charged per share you buy, or as a percentage of your overall trade.
Spread betting, on the other hand, is commission free. All the costs to open and close your position are contained within the spread, which is the difference between the buy and sell prices you’ll see listed on a market. So while you might notice that spread betting markets have slightly wider spreads than investing markets, it can work out cheaper to trade because there’s no commission.
However, if you want to keep a spread betting position open over the long term, you’ll pay overnight financing.
Shorting means opening a position that earns a profit if the underlying market falls in price, and a loss if it rises. It can be a useful way of earning a return when you think a bear market’s on the horizon.
While shorting is technically possible when share dealing, it can be a complex process involving borrowing stock. Plus, it leaves you open to the chance of a dreaded ‘short squeeze’.
As you’re only speculating on price movements with spread betting, to go short you bet that your market is going to fall in price instead of rising. There’s no stock borrowing involved, and you can short any market.
What you can trade
Perhaps the biggest difference between spread betting and share dealing, though, is the number of asset classes you can trade.
With share dealing, you’re limited to stocks and exchange-traded funds (ETFs). While that still gives you thousands of markets to choose from, with spread betting you still get access to those stocks and funds – plus indices, forex pairs, commodities, bonds and more.
Every market is accessible from a single account, too. You simply sign up for a City Index account, load up our award-winning platform and choose from a huge range of trading opportunities.
Should I invest or spread bet?
Let’s take a look at a detailed comparison of spread betting and investing to help you decide which is best for you:
|Shares spread betting||Share dealing|
|Leverage||Leveraged, so you don’t pay the full cost of positions upfront||Unleveraged, so you pay for the full value of your stock|
|Available asset classes||Shares, ETFs, forex, indices, commodities, bonds, more||Shares and ETFs|
|Overnight funding||You’ll pay to keep positions open overnight||You won’t pay to keep positions open overnight|
|Tax||Tax-free*||Taxed, unless you’re using an ISA|
|Suitable for…||Short and medium-term traders||Long-term investors|
|Dividends||Your account is updated to reflect the dividend||You are paid the dividend|
|Commission||No commission, only the spread||Commission on all markets|
|Shareholder rights||None, as you never own the stock||Full shareholder rights|
|Going short?||Yes||Yes, but can be complex|
* Spread Betting and CFD Trading are exempt from UK stamp duty. Spread betting is also exempt from UK Capital Gains Tax. However, tax laws are subject to change and depend on individual circumstances. Please seek independent advice if necessary.
Why you should spread bet
In general, spread betting could be for you if you want:
- To trade over the short or medium term
- To access lots of different asset classes, including forex pairs and indices
- To be able to go short as well as long
- To access leverage, making your capital go further
Why you should invest
Investing, on the other hand, could be for you if you want:
- To invest over the long term
- To stick to buying stocks and ETFs
- To build a portfolio that earns a profit if your investments go up in price
- To buy assets outright, paying for their full value upfront
Example of a spread bet vs a share trade
Follow along with this example to see how spread betting on a stock works differently to investing in practice.
Say, for instance, that you want to go long on Diageo stock when its share price is at 3600p. You could invest in Diageo or open a spread bet.
Investing in Diageo
Your broker lists Diageo stock at 3,599/3,601, and you buy 200 shares at 3,601p, paying (200 x 3601p) £7,202 upfront for your investment (plus commission). The shares are now part of your portfolio.
Diageo moves up to 3,755, and your broker’s new price is 3,754/3,756. You decide to cash in on your profit, selling 200 shares at 3,754 – a total of £7,508, minus commission.
You bought your shares for £7,202 and sold them for £7,508, earning a profit of £306. However, commission takes that profit down to £286.
Spread betting on Diageo
Diageo’s spread bet market is priced a 3,596/3,604, which means you can go short at 3,596 or long at 3,604. You want to go long, so you buy £2 per point at 3,604. This is the equivalent of buying 200 shares, and will earn you £2 for every penny that Diageo stock rises and lose you £2 for every penny it falls.
The total position size is (£2 x 3,604) £7,208. Remember, though, that spread betting is leveraged, so you won’t need to pay £7,208 for the shares. Diageo has a margin requirement of 20%. So you only need 20% of 7,208, or £1,441.60, in your account to make the trade.
Diageo moves up to 3,755. The spread market is now priced at 3,751/3,759, and you sell £2 per point at 3,751 to close your trade.
You bought at 3,604 and sold at 3,751, so the market has moved 147 points in your favour. Multiplied by your £2 per point, you’ve earned a profit of £296. Notice how the market has moved a total of 155 points, but your profit is only 147? That’s because you’ve paid for the position via the spread.
If this trade was open for more than one day, you’d also pay overnight financing.