When you start any sideline or freelance business, one of the most important issues to deal with is handling your income and paying your taxes. The differences are varied from country to country in how to pay your taxes and what income is even subject to being taxed. It pays to educate yourself about the best ways to shelter what income you can from the taxman, legally, of course. That knowledge and skill set may be the most valuable you acquire as you explore ways to trade online.
Spread betting is indeed free from capital gains tax in the United Kingdom. The trading practice is illegal in the United States, because regulators consider the practice to be as close to gambling as possible. Spread betting got its start in the sports gambling world, but it quickly migrated over to the financial markets, where intrepid speculators can guess on the price change of a particular financial instrument.
Let’s say that you want to speculate that the price of a mining stock index is going to rise from $1000 to $1400 by the close of trading. You can find a spread betting exchange and bet $100 per point that it moves.
When you get involved in spread betting it is important to note that this is a leveraged method of working in the markets. That means that you can only put down a portion of your position into an account in order to take that position on a bet. That could mean that you only risk $50 and make $500 but it could also mean that you risk losing $500 when you bet $50. The losses can exceed the bet.
Not only is spread betting free for cap gains taxes in the UK, you do not have to pay stamp duty or commotions on your winnings. That makes the idea of spread betting tantalizing. You can bank more of your profits from the practice than you could trading on other types of financial instruments. If you are in any way proficient at spread betting, you can benefit from the tax break and make a killing compared to other forms of financial investing.
It pays to understand how exactly spread betting works as well. The bid is what an investor or traders might offer to buy a security and the ask is what the market maker or broker is setting as the price. The difference between those two prices is the spread. Supply and demand. It harkens back to freshman year economics. When investors are super interested in a stock or product, the spread gets tighter and tighter. With computers algorithms getting better and better at matching buyers and sellers the spread is moving constantly. Being able to predict the movement can be a very lucrative skill to have.
While risk management in regular trading is such an important and complex topic, the same is true for spread betting. You want to be sure that you know how much money you have out there at any one time, so you can keep track of your orders and bets. Taking control of your risk profile is vital.
Day traders tend to be very good at predicting the movement of spreads, because they spend all day staring at screens and trying to determine where the bid tick is going. Watching it day after day can give an intuitive feeling to traders and investors that are always paying attention to the markets. So getting into spread betting can be an effective way to diversify your income stream, with the added benefit of avoiding capital gains taxes. Spread betters in the United Kingdom can be sitting pretty, if they are good at the game.