For various reasons, some of which we will explain below, spread betting, or spread trading as it is called in some countries, is becoming more and more popular among traders. For the uninitiated this basic spread betting guide will provide a background to what spread betting is and its advantages and disadvantages over other forms of trading.

When you trade via a spread betting company, you are not buying and selling individual shares, commodities or currencies in a physical sense. You are merely betting that the price of the market will either go up or down. If you correctly predict the direction of the market, your profit will be based on the extent of the movement just as if you were trading in those instruments.

If you trade shares on the stock exchange, you have to pay commissions on every trade. With spread betting there is no direct commission. The commission is built into the ‘spread', which is the difference between the buying and selling price.

While the name spread betting might lead you to think that this is a form of gambling, this is not strictly true. Spread betting in the UK is regulated by the Financial Services Authority (FSA), not the Gambling Commission. This an indication that even the UK government realises that there is a difference between spread betting and gambling.

However when looking at tax, spread betting is more like gambling in that spread betting is tax free. In accordance with current United Kingdom tax law there is no capital gains tax, no income tax and no stamp duty on spread bets, note that this can change or differ subject to your own situation.

In the past most spread betting contracts were on a quarterly basis. Such a contract would have a fixed expiry date and if you wanted to extend it, you had to ask to roll it over and pay a commission again; often 50% of the normal spread.

Most investors now use ‘daily rolling spread bets', these contracts stay open as long as you want. The difference is that the spread betting company will charge you interest on open long positions and pay you interest on open short positions. The rate is normally based on the London Inter Bank Offered Rate (LIBOR) plus or minus a few percentage points.

On such a contract you will also be credited with a percentage of dividends that are declared on long positions, but you have to pay in a percentage of declared dividends on short positions.

One of the biggest advantages of spread trading is that it is a leveraged form of trading. That simply means you can often control an investment of up to 100 times of the amount of money that you have deposited. Put simply, if you correctly predict the price movement, your profits are magnified. Note though that your losses are also magnified.

Apart from leverage, spread betting has many other advantages including the fact that, as mentioned above, profits are currently tax free in the UK (based upon present UK tax law, this might change/differ depending on your own circumstances).

Also companies like GFT and FinancialSpreads.com let you trade 24 hours a day, 5 days a week on many markets such as EUR/USD, gold, crude oil and the FTSE 100.

Spread betting does carry a high level of risk to your capital and can result in losses that are greater than your stake. Ensure that spread betting matches your trading objectives as it might not be suitable for all types of investor. Before making any trades, make sure you are fully aware of the risk. Only spread bet with money that you can afford to lose. If required request independent advice.