Share dealing vs spread betting: What UK investors need to know

This guide explains how each approach works, what costs apply, how UK tax rules differ, and what risks accompany each method. Neither is universally superior. The better fit depends on your financial situation, goals, and attitude to risk.

What is share dealing?

Share dealing is the traditional route to stock market participation. When you buy shares through online share dealing platforms or a stockbroker, you acquire actual ownership stakes in companies.

How share dealing works

You open an account with a broker, deposit funds, and place orders to buy shares listed on exchanges such as the London Stock Exchange or overseas markets. Once your order executes, you become a shareholder. In many cases your shares are held in a nominee account via your broker (the nominee appears on the register), but you remain the beneficial owner.

As a shareholder, you typically receive:

• Voting rights at company meetings

• Dividends if the company distributes profits

• A claim on company assets if the business is wound up

Your potential profit or loss depends on the difference between your purchase price and eventual sale price, plus any dividends received. If you buy 100 shares at 500p each and later sell at 600p, your gain is £100 (before costs and tax).

Costs associated with share dealing

Share dealing involves several cost layers:

• Dealing commission: Many platforms charge a fee per trade, ranging from zero on commission-free platforms to £10 or more with traditional brokers.

• Stamp duty reserve tax: UK share purchases attract 0.5% stamp duty on the transaction value. If you buy £10,000 of shares you would have to pay £50 in stamp duty.

• Platform fees: Some providers charge monthly or annual custody fees, particularly for ISA or SIPP accounts.

• Foreign exchange fees: Buying overseas shares is likely to involve a currency conversion, often at a range between 0.5% and 1.5%.

These costs accumulate, particularly for frequent traders or those building diversified portfolios.

What is spread betting?

Spread betting is a leveraged derivative product, allowing you to speculate on whether the price of an instrument will rise or fall. You never own the underlying asset.

Risk warning: spread betting carries significant risk. It’s a leveraged product, meaning losses can exceed your initial margin, as trades are based on the full value of the position. It may not be suitable for all traders. You should ensure you understand how spread betting works and whether you can afford the risk of losing money.

How spread betting works

Rather than buying an asset, you place a bet on price direction. You decide whether you believe the price will rise or fall, then stake an amount per point of movement.

For example, if a share trades at 500p and you believe it will rise, you might "go long" at £10 per point. If the price rises to 520p, your profit is 20 points multiplied by £10, equalling £200. If the price falls to 480p instead, you lose £200.

Spread betting on shares works identically to spread betting other instruments like indices, commodities, or forex. The mechanics remain the same regardless of market.

Understanding the spread in trading

What is a spread in trading? The spread is the difference between the buy price and sell price quoted by the provider. If a share has a buy price of 501p and a sell price of 499p, the spread is 2 points.

This spread represents the provider's primary revenue source on spread betting. You start each position slightly in the red because you must overcome the spread before reaching profit. Tighter spreads mean lower implicit costs. Spreads vary by instrument, market conditions, and provider.

Key differences between share dealing and spread betting

The contrast between spread betting and share dealing extends across ownership, taxation, leverage, and costs.

Ownership of assets

This is the fundamental divide:

With share dealing, you hold a tangible stake in a company. With spread betting, you hold a contract with your provider.

Tax treatment in the UK

UK tax rules treat these products differently:

Share dealing profits are subject to capital gains tax when they exceed your annual exempt amount. Dividend income is taxed at dividend tax rates above the dividend allowance.

Spread betting profits are currently exempt from capital gains tax and stamp duty under UK tax law. Losses can’t be offset against other gains.

However, tax treatment depends on individual circumstances and may change. If spread betting becomes your primary income source, HMRC might classify you as a professional trader, changing your tax position.

Leverage and margin requirements

Share dealing typically uses your own capital. You can’t buy £10,000 of shares with £1,000 unless using borrowed money from a separate loan or margin account.

Spread betting uses leverage by design. Spread betting margin requirements mean you deposit only a fraction of the full position value. If the margin is 20%, a position with £10,000 exposure requires a £2,000 deposit.

Leverage amplifies both gains and losses proportionally. A 10% price movement with 5:1 leverage produces a 50% change in your capital. This creates opportunity but also added risk. Losses can exceed your initial margin, though retail customers can’t lose money than their account value thanks to negative balance protection.

Example of leverage impact:

The spread betting outcome relative to capital at risk is magnified in both directions.

Costs and fees compared

Share dealing costs are more visible upfront. Spread betting costs can be found within spreads and overnight holding costs. For short-term positions, spread betting may entail a lower outlay. For long-term holdings, overnight financing costs can accumulate, potentially making conventional share dealing more economical despite stamp duty be payable.

Risks to consider

Both approaches carry risk, as set out below. Your capital is at risk whenever you trade the financial markets.

Share dealing risks

Market risk: Share prices can fall, sometimes dramatically. Individual companies can lose most or all of their value through poor performance sector downturns, or even a scandal.

Liquidity risk: Smaller company shares may be difficult to sell quickly without accepting a lower price.

Concentration risk: Holding few shares exposes you to individual company fortunes.

Currency risk: Foreign shares expose you to exchange rate movements.

Despite these risks, your maximum loss is limited to your invested capital. You can’t lose more than you put in.

Spread betting risks

In addition to the above risks, which also apply to spread betting, there is also the leverage risk.

Amplified losses: leverage magnifies losses as well as profit. A small adverse price movement can eliminate your initial margin rapidly.

Losses can exceed your initial margin: you may have to add funds to your account to cover your leveraged position, particularly if the market moves against you.

Overnight financing: Holding positions for extended periods incurs daily charges that can erode returns.

Gap risk: Markets can move sharply overnight. You might face losses greater than anticipated if prices gap past your stop-loss level. To prevent this risk, you can add a guaranteed stop-loss order (GSLO) for a premium, which guarantees to close your position out at the level you’ve specified. If the GSLO isn’t triggered, the premium cost is refunded in full.

Psychological pressure: Fast-moving leveraged positions can prompt emotional decisions and overtrading.

Spread betting demands strict risk management. Many experienced traders recommend never risking more than 1-2% of capital on any single position and always using stop-loss orders, though stop-losses do not guarantee execution at your chosen price in volatile markets, as mentioned above.

How spread betting compares to CFDs

Spread betting versus CFD trading often confuses newcomers because both are leveraged derivatives allowing speculation without ownership.

Key similarities:

• Both use leverage and margin

• Neither confers asset ownership

• Both allow long and short positions

Key differences:

CFDs suit traders who may want to offset losses against gains for tax purposes, or those outside the UK where spread betting is unavailable. Spread betting suits UK residents primarily seeking tax efficiency, though this should never be the sole consideration given the risks involved.

Which approach might suit different goals?

Which approach is most suitable for you depends on a number of factors.

Share dealing may suit:

• Long-term investors building wealth gradually

• Those looking for regular dividends, and/or shareholder rights

• Investors preferring lower complexity

• People uncomfortable with leveraged trading

• Those using ISAs or SIPPs for tax-efficient investing

Spread betting may suit:

• Experienced traders that understand leverage risks

• Short-term speculators with active strategies

• Those wanting to profit from falling prices

• Traders comfortable with technical analysis and risk management

• People seeking to diversify and gain exposure across different markets

• Those wanting to put up less capital

Some traders and investors use both. They might hold core portfolio positions through share dealing, while using spread betting for tactical short-term moves. This dual approach is likely to require a distinct strategies.

Summary

Share dealing and spread betting serve different purposes despite both providing market exposure.

Share dealing means ownership, voting rights, dividends, and capped downside at your investment amount. Costs include commissions, stamp duty, and platform fees. Profits face capital gains tax above allowances.

Spread betting means speculation without ownership, using leverage that amplifies both gains and losses. Costs sit within spreads and overnight financing. Profits are currently tax-free, but losses can’t be offset for tax purposes.

Before choosing an approach, consider your financial goals, risk tolerance, investment horizon, and whether you genuinely understand the products involved. If uncertain, seek independent financial advice before committing capital.

Whichever path you explore, remember that all investing and trading involves risk. Past performance offers no guarantee of future results, and you should never risk money that you can’t afford to lose.