When I invest money, it’s mostly done passively through the stock market. My routine is to take my extra money and invest it in index mutual funds with Vanguard. It’s a pretty passive way to invest. I don’t do anything other than choose what funds go in what account and manage the asset allocation as my money grows. I won’t make any withdrawals until I retire. I earn thousands each year with doing only a few hours work. Gotta love capitalism.
I’ve always thought this ‘buy – hold – sell’ was the easiest way to invest money. But recently I became aware of an even simpler way to invest. It’s a way of investing (or better – we’ll get to that word in a minute) where you don’t actually buy the underlying asset.
What I’m talking about is called spread betting. It’s becoming quite the popular thing over in the UK. I recently read an article in The Independent titled, ‘Spread Betting: Time to Jump on a Global Bandwagon‘ It supports an article I read earlier in the week that claims over 1 million Brits are now spread betting.
What is Spread Betting?
Click this link for a more professional answer. If you want a more conversational tone, keep reading this blog post.
Spread betting is the practice of speculating whether a stock will rise or fall. If Apple is trading at $100 per share, that means it’s at 10,000 basis points. If you think the price of Apple will rise, you place a bet that will it rise and you make a wager. Let’s say $5 per basis point. If apple rises 20 basis points in a day, you get $100. All without ever needing to pay capital gains because you technically never owned any stock. All you did was speculate.
Spread betting is sort of appealing. However, if I were a day trader, it would be VERY appealing. The pitfall to day trading is, although you may make a fast profit, you are taxed with short-term capital gains. Short-term capital gains in the USA are taxed at your ordinary income tax rate. If you earn a good amount of money each year, that means you can get taxed nearly 40% for your trades as a day trader. 40% of your profits gone just like that. With spread betting, you essentially have the opportunity to increase your day trading profits by 40%. Also, with spread betting, you can invest in all sorts of asset classes: stocks, forex, indexes, commodities, options, interest rates, bonds, and even bitcoin.
Is spread betting worth the risk?
Everyone has a different tolerance for risk. I invest largely in index mutual funds in the stock market. Some people think that is very, very safe. Others would condone me for not owning my age in bonds.
The world of investing is too complicated to get a one size fits all answer. Since I don’t currently participate in spread betting myself, I can’t even use my experience to say if personally I think it’s worth the risk. I never give a final report on something until I’ve tried it myself. Because… you never really know until you know. You know?
Are you involved in spread betting? What are your thoughts? Perhaps you can write a guest post and finish my thoughts for me.
What I can say is living a life without risk is living a life without reward. As cliche as it sounds, it’s true. Another thing I try to remember to do is keep an open mind. Spread betting sounds awful, I’ll admit. But putting a mental wall up is a poor way to expand your knowledge.
Until next time,