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Spread betting vs futures

I am often asked this question so I thought I would add an extra page here to what I believe are the main advantages and disadvantages for both financial spread betting and the futures market. Which route you choose will naturally be a personal choice, and there are pros and cons for both, but ultimately it depends in the type of trader you are, and your trading style and philosophy.  There are a whole range of issues, and no doubt if you collected a group of traders together, they would never be able to agree. From a personal point of view I have traded both, and would say that in very broad terms, futures trading has been designed with the professional trader in mind, whilst spread betting has been created for the retail trader. This is not to say one is better than the other, it is perhaps more to do with the historical background and why these markets were created originally. So what are some of the advantages and disadvantages of both systems?

Let’s start with spread betting as this is a spread betting site, and look at some of the advantages and disadvantages. The first obvious advantage is that spread betting is tax free as there is no capital gains tax, as it falls under the UK gaming laws for tax purposes. If you think you will make significant profits then spread betting has the advantage over futures. The next point is perhaps less obvious if you have never traded in futures, but the trade size in spread betting is generally smaller than in the futures market. As an example take the FTSE 100 index contract, in the futures market this is currently £10 per contract, whereas in the spread betting market you may find them for as little as £1 or £2 per unit. Having started my trading life in FTSE100 futures I can assure you that volatile movements at £10 per index point are an interesting ride and make stop placement challenging!

At the moment spread betting seems to be winning, but how about these disadvantages. Firstly the spreads – if you compare contracts between the two markets, you will find much tighter spreads in the futures market than in spread betting. For day traders this is vital – if you are fighting against a 5 or 8 point spread and the market only moves 80 points in the day, that’s 10%. Now another disadvantage of spread betting is that these are OTC trades, and not on a central exchange. As we have already seen the market is unregulated, and there is no central exchange. Products and terms will vary from one spread betting company to another with no uniformity of product or execution. As a result you are trading against your broker – stop hunting can and does happen I’m afraid. The futures market is very different – it is highly regulated and markets are traded through central exchanges with transparency of order flow. Indeed for professional traders the ability to see the order flow is critical, which is simply not available in spread betting. Finally, one advantage for spread betting which is often overlooked is the advantage of being able to trade in foreign securities but without the risk of being exposed to currency exchange fluctuations. Naturally your holding can increase or decrease depending on the currency movements, but with a spread bet this risk is removed and the security is traded in your home currency.

In summary, I would say there are advantages and disadvantages to both – it really depends on what you are trying to achieve. Spread betting is always sold as tax free, but one wonders how many traders ever make enough to benefit from the tax saving. Probably nearer to the truth is that spread betting is an easier sign up, as it has been designed with the retail investor in mind. Which you choose is up to you, but I hope the above has given you a balanced view of both.