Saturday, 20 January 2018

Shares and Spreadbetting

What is good about shares and what is good about spreadbetting?

With spreadbetting there is no capital gains tax and no stamp duty. You only pay the ‘spread’ so there are no dealing costs.
You can go ‘short’ with spreadbetting which means you are betting that the price will go down. You can’t do that with shares.

However you can also win big and lose big. You have to put a limit and stop on when you put on a trade. You have to know what you’re doing when you’re spreadbetting. You probably should look at it everyday. If you're doing badly you certainly have to look at it- to adjust your stop losses perhaps. The spread amount can change. Aim to get as low a spread as possible. Bigger market caps are better for this. Ideally you want the spread to be around 0.25%. If a spread is over 1% it may not be worth doing.

If you hold a spread it should be going up or down a fair amount. If it stays flat or even only slightly up or down you shouldn’t hold it. You can with a share though.

Have a clear target price or stop loss. Consider using a ‘trailing stop loss’- a sell if it drops a certain amount below the current spread level.

You also have to pay a ‘stock borrowing’ small charge with a short. Ideally you should have a catalyst as well as a high valuation with a short. High valuations can get even higher on misplaced sentiment.

Smaller amounts means I can take a position on any share I want. You can get exposure to practically anything with spreabetting.
At the same time though you have to be careful not to watch spreads too much. Watching too much means you might do something just for the sake of doing it. Really you should just pounce on great opportunities.

With shares you don’t have to set a stop loss or limit price. Overall when you’re buying a share it’s a more long term investment. Probably you will intend holding for at least a year. Often longer- I have held some shares for over twelve years. There’s less potential risk and less potential reward with shares.

Overall if you’re starting in shares what you should you do?

It’s less risky to start with shares if you’ve got a decent amount of money. It’s also practice for doing spreadbetting later if you want. Remember if you’re buying a share though you should put at least £1,000 in- that’s if you can get dealing costs for £5. With stamp duty that will bring your costs to 1%.

There is something to be said for the ‘learning experience’ of doing spreadbetting though, although I would recommend starting with small bets first. A share like Lloyds at the right price is a decent example. Even if you only break even in the long run it would be worth it for the learning experience.

For me personally I will continue to do a mixture of spreadbetting and shares. I still have plenty to learn about shorting UK shares and more to learn about the ‘technicals’ with spreads overall. I think as long as I have enough money I’ll be doing both for the rest of my life.

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