Difference between spread betting vs share dealing

Let’s take a fictional, medium-sized company called 'ABC', which is currently trading on the stock market at 299.5p to sell and 300p to buy.

Our investor has around £1,500 to invest so they decide to buy 500 shares. This means they have invested £1,500 in ABC, but on top of this there are some trading charges of course. First of all there is commission to pay, and this amount can vary from very little to quite a lot, depending on your stockbroker and the services offered. Let’s assume our investor’s stockbroker charges a rate of £10 for commission on this trade. But we are not done with charges, there is also the government’s slice, or stamp duty, which at the time of writing was 0.5% on shares, so that’s another £7.50 in charges on this transaction.

Now, let’s fast forward a month into the future.

Our investor is delighted that ABC's share price have risen by 10% and so they decide to sell. The market price for ABC has risen to 329.5p/330p and they sell 500 shares at 329.5p per share, receiving £1,647.50. There is usually a charge for selling through your stockbroker, so let's assume this transaction costs £10 again. Now that our investor has concluded the sale of their shares, let's look at what their total profit is.

To buy the shares, including stamp duty and commission, they had to spend £1,517.50. When selling, after paying commission again on the sale, they received £1637.50, so the profit on this deal was £120 – an excellent return after just one month, but was there a more cost-effective way of doing this?

Now let’s look at taking on a similar position by spread betting shares​. The spread betting price quote on ABC is slightly wider than the market, so we will use 298.5p to sell, 301p to buy. To have the same exposure as buying 500 shares our investor needs to buy £5 per point. If you look at the maths here, it makes perfect sense: £5 x 301= £1505. So the position value of the shares using a spread bet is equivalent to £1505 worth of shares. If the value of the shares increases or decreases then the spread bet will follow suit.

There's no commission or stamp duty to pay when spread betting shares and, because spread bets trade on margin, our investor does not need to tie up all their capital. It is important to remember however that the loss you could make on a bet may exceed the amount of margin that you used to enter into that bet. This is a feature of leverage (margin trading) and it means that your losses are magnified and you can lose more than your deposit. Let’s assume the margin deposit for this particular share is 10% of the value of the position. This means that, in this case, £150.50 would be allocated from the investor's spread betting account to open a spread bet worth £1,505 on company ABC.

There would of course have been some charges incurred along the way as well when spread betting shares. If a trader holds their position overnight, they will be charged a spread betting holding cost. This rate is usually based on Libor (London Interbank Offered Rate) plus a percentage, which will vary from broker to broker. Let’s assume our investor’s broker charges Libor + 2.5% and Libor is currently 0.45%. This means their financing will cost 2.95% if held for a year, but this is broken down to a daily rate so the daily cost for this spread bet is around 0.0081%. On a position value of £1,505, that equates to about 12p per day. Over the month that would mean financing charges of around £3.65 would have been deducted from our investor's account, leaving them with an overall profit of £133.85. That’s still more than they would have made buying the shares through a traditional stockbroker, plus our investor did not have all of their £1,500 tied up in the shares – they had ample funds left over to take advantage of other opportunities if they wanted to.