Monday 16 April 2012
Spreadbetting or ISA's or Trading
Now this post is not really about choices for those portfolio's, but about your options. Increasingly in the past few years spreadbetting companies have been undergoing exponential growth - certainly in terms of numbers if not in terms of profits. It is easy to see why, spreadbetting has some big advantages over regular investing:
- There is no tax to pay, yes ISA's maybe tax free, but normal trading exposes you to the £10k limit on profits per year before Capital Gains Tax. Not only that, but it is very complicated working out how much tax you actually owe, thanks to the many byzantine rules put in place by HMRC.
- You can use leverage too, no need to have £50k when you can you half that and leverage up - all the better for profits and leverage.
There are some disadvantages, such as there are fewer options for investment and the margin is often higher on the spreadbets than the market makers offer by some distance. All in all though, spreadbetting makes sense if you have plenty of money. This is why all the City traders I know do it, that and it helps them to avoid being done for insider trading when they have a little bit of news.
Personally, I think the leverage can kill you. This 'benefit' is responsible for Spreadbetting companies having 70% of their customers losing money. One bad position and you are finished, particularly if you have volatile shares or markets (an oxymoron these days, surely). So it is ISA's and a small trading account for me.
However, the imposition of spreadbetting is hurting these options. For the spread betting companies hedge their positions in the real market. That is, you buy 10 BP shares on a bet, they are looking to make only the margin, so they go long ten BP shares (or more likely some complex equivalent from a Delta One desk) to hedge their position. Great for them and sensible, they can't lose.
But, this is real trading, not gambling. Your £10 long has found its way into the market, affecting the actual shareprice (in this case, by only an infinitesimal amount, but a few thousand shares in an illiquid stock would be very different). When you gamble on the Grand National, you may affect the odds with your bet, but not the race.
This is a crucial difference, as once gambling is actually trading, which this is, then it should not be free from taxes. It is these days a different and tax free way of trading, albeit with more risk. Shareprices do go up and down due to people taking spreadbet positions. If it walks like a duck, quacks like a duck, then it is a duck.
Now of course, I am not going to argue purely for taxes to go on to spreadbetting, but tax equalisation whereby rates are equal for whichever form of investment you choose should be the right way forward, bu the same total percentage as today is collected.
Spreadbetting is influencing the market, it should be taxed as the trading that it is.