Risks in Financial Spread Betting

Risks in Financial Spread Betting
Financial spread betting, derivatives with high leverage, has become a very popular trading strategy, as it offers a tax-free return of high leverage. Spread betting has grown exponentially over the past decade as a result of improvements in the electronic trading platform and mobile, especially in England.
In recent years, spread betting is only popular among sophisticated investors and hedge fund traders, but now, spread betting started to become increasingly popular among individual traders. Although banned in the United States, it is allowed and regulated in the UK by the Financial Conduct Authority or the Financial Conduct Authority (FCA).


Understanding Risks Financial Spread Betting.
It is generally considered that the spread betting produces a higher after-tax returns to investors. However, this idea is not entirely accurate, and there is a trade-off between the cost of the spread betting and commission and taxes in the conventional trade. Whilst spread betting allows traders to save commissions and taxes paid on the value of trading, traders typically have to pay spreads that may be higher than the commissions and taxes paid in the conventional spot market trading. For example, if Microsoft (MSFT) is trading at 45 pounds in the stock market, bettors tend to buy the scrip at a higher price (£ 45.50) and sell at a lower price (£ 44.50).


The main risks involved in Financial Spread Betting:
Trading with high leverage: Unlike the spot market, where users invest a total price of a security (except using derivatives or bought on margin), spread betting requires little capital to get started. Usually about 1% -10% of the value of the trade to get into the trade. Spread betting with high leverage led to traders suffered losses quickly and result in a margin call to perform the initial trade position in the case of an adverse price movement. For example, A does spread betting only need to pay £ 2,250 (5% margin money) to buy the 1000 Microsoft (MSFT) shares at 45 pounds. Therefore, the value of total investment is £ 45,000. However, the decline in stock prices by 5% (£ 2.25) will reduce the value of the total investment to £ 42,750 and will cause the loss of the initial investment of £ 2,250.
The risk of counterparty failure: Since no institution or clearing house to guarantee the transaction spread betting, bettors depending on the credit worthiness of a company that offers spread betting to clear the transaction and receive payment. As a result, unlike the spot market, there is minimal regulation and lower governance to ensure transparency. This further shows the bettors to risk associated with trade licenses, payment, cash margin requirements, etc.
Price Distortion: spread betting are used to speculate on price movements of securities, where traders do not have the underlying asset. Sometimes, betting developing the underlying asset price and trading volume affect actual price discovery of securities. Similarly, the tax profit motive must have developed a trading volume that may affect the actual economics of security.
ConclusionFinancial spread bettors exposes to the risks associated with leverage, the risk of failure betting counterparty, regulatory developments, the high cost of trading and price distortions. However, most of the risk is justified by the return of leveraged tax free in spread betting compared to conventional stock trading. (Pr & Dk)