Is it possible to spread bet without using Leverage?
Is it possible to spread bet without using Leverage?
A spreadbetting account is a margin account that employs leverage. The amount of leverage you are exposed to would depend on your stake size and account balance. For example if you wanted to trade the FTSE 250, which is currently at 17,729, placing a position with a stake size of £1 would be equal to buying £17,729 of the underlying. So lets say you put all the £17,729 into your spreadbetting account and opened a position with a £1 bet size. Hence with this stake size, you will not really be leveraged at all in a sense, because any 1% movement in the underlying i.e 17,729x0.01 = 177.29pips x £1, would equal £177.29 in profit, which would mirror a 1% increase to your account balance.
But as one of the advantages of the spread bet, is that you don't have to put up all of the £17,729 to benefit from the price movement in the underlying. For example, you can open a spread bet account, place your position, but only require say 5% in your account so, you can have £17,729 of exposure with only £886.45 in your account. If this were the case, then the 1% movement and resulting £177.29 in profit, would actually be 20% profit based on your account balance (177.29/886.45), so your gearing or leverage, would be 20:1.
The ability to set a different stake size and the size of your account balance will ultimately determine your leverage. The advantage of using leverage is that you can amplify your returns with less outlay. So say you had £17729 to invest, you can either buy a FTSE 250 ETF using all the £17729, or you could put it all in a spread bet account and bet £1 per point for a 1:1 leverage, ie, no gearing or no leverage, or just place down the 5% margin, for a 20:1 leverage and have £16842 of extra capital that you can use for other purposes.
So leverage to me means a gearing ratio, so when you say "Is it possible to spread bet without using Leverage" that means to me having an account size and stake size that is equal to a 1:1 gearing ratio.
Say with the same £17729 in your account, you could bet £2 per point, which would equal a gearing of 2:1 because a 1% movement in the underlying ie 177.29 x £2 = £354.58 in profit is equal to 2% of your account balance (354.58/17729). You could even reduce your risk further by betting only £0.50, which would mean a 1% movement in the underlying would only equal a 0.5% change in your account balance! However, If you decide to only leave the required margin amount in the account, then your gearing or leverage will significantly change.
So is there any advantage in the spread bet way? You won't need to pay capital gains tax on any profit, say if the index rose by more than 50%, then you might earn enough profit to be eligible for the tax. If you only have a small starting grubstake, then the tax advantage will be of no benefit if you don't earn significantly more than your tax free allowance. On the other hand, by holding the position in a spread bet account, the daily financing charges might eat into your profits so if you have access to a tax free ISA, it might just be better to buy and hold a FTSE 250 ETF within your ISA, as you won't need to pay the daily financing charges that the spread bet firm will charge. However, if you don't plan to buy and hold, but to day trade, then the spread on each trade would be much cheaper than the commission you'll have to pay to a broker buying and selling the ETF. For example if you wanted to day trade a FTSE 250 ETF, you might have to pay £7 commission for each trade, so £14 on each day trade, whereas, if you bet £1 per point with a spread bet, and with a 2 pip spread, each trade would only cost you £2. So trading the FTSE 250 daily might be cheaper with a spread bet firm, and closing out your trade before the overnight financing charges are applied, but if you have access to a tax free ISA, and only plan to buy and hold, it would probably work out cheaper not using a spread bet firm.
This is only an example, because you might not have £17729 available to invest, but is just used to illustrate the concept of gearing and leverage.
Is it possible to spread bet without using Leverage?
A spreadbetting account is a margin account that employs leverage. The amount of leverage you are exposed to would depend on your stake size and account balance. For example if you wanted to trade the FTSE 250, which is currently at 17,729, placing a position with a stake size of £1 would be equal to buying £17,729 of the underlying. So lets say you put all the £17,729 into your spreadbetting account and opened a position with a £1 bet size. Hence with this stake size, you will not really be leveraged at all in a sense, because any 1% movement in the underlying i.e 17,729x0.01 = 177.29pips x £1, would equal £177.29 in profit, which would mirror a 1% increase to your account balance.
But as one of the advantages of the spread bet, is that you don't have to put up all of the £17,729 to benefit from the price movement in the underlying. For example, you can open a spread bet account, place your position, but only require say 5% in your account so, you can have £17,729 of exposure with only £886.45 in your account. If this were the case, then the 1% movement and resulting £177.29 in profit, would actually be 20% profit based on your account balance (177.29/886.45), so your gearing or leverage, would be 20:1.
The ability to set a different stake size and the size of your account balance will ultimately determine your leverage. The advantage of using leverage is that you can amplify your returns with less outlay. So say you had £17729 to invest, you can either buy a FTSE 250 ETF using all the £17729, or you could put it all in a spread bet account and bet £1 per point for a 1:1 leverage, ie, no gearing or no leverage, or just place down the 5% margin, for a 20:1 leverage and have £16842 of extra capital that you can use for other purposes.
So leverage to me means a gearing ratio, so when you say "Is it possible to spread bet without using Leverage" that means to me having an account size and stake size that is equal to a 1:1 gearing ratio.
Say with the same £17729 in your account, you could bet £2 per point, which would equal a gearing of 2:1 because a 1% movement in the underlying ie 177.29 x £2 = £354.58 in profit is equal to 2% of your account balance (354.58/17729). You could even reduce your risk further by betting only £0.50, which would mean a 1% movement in the underlying would only equal a 0.5% change in your account balance! However, If you decide to only leave the required margin amount in the account, then your gearing or leverage will significantly change.
So is there any advantage in the spread bet way? You won't need to pay capital gains tax on any profit, say if the index rose by more than 50%, then you might earn enough profit to be eligible for the tax. If you only have a small starting grubstake, then the tax advantage will be of no benefit if you don't earn significantly more than your tax free allowance. On the other hand, by holding the position in a spread bet account, the daily financing charges might eat into your profits so if you have access to a tax free ISA, it might just be better to buy and hold a FTSE 250 ETF within your ISA, as you won't need to pay the daily financing charges that the spread bet firm will charge. However, if you don't plan to buy and hold, but to day trade, then the spread on each trade would be much cheaper than the commission you'll have to pay to a broker buying and selling the ETF. For example if you wanted to day trade a FTSE 250 ETF, you might have to pay £7 commission for each trade, so £14 on each day trade, whereas, if you bet £1 per point with a spread bet, and with a 2 pip spread, each trade would only cost you £2. So trading the FTSE 250 daily might be cheaper with a spread bet firm, and closing out your trade before the overnight financing charges are applied, but if you have access to a tax free ISA, and only plan to buy and hold, it would probably work out cheaper not using a spread bet firm.
This is only an example, because you might not have £17729 available to invest, but is just used to illustrate the concept of gearing and leverage.
