Spread-betting is a form of investment that has experienced significant growth over the past five years. Until recently a niche offering in the UK, spread-betting is growing considerably – with some estimates putting growth as high as 20 per cent a year.

Where has this growth come from? Certainly part of the growth can be attributed to attractive tax-free gains, the increase in personal disposable income and the advent of new technologies – primarily, and most significantly, the internet – which has given investors instant access to the market, live and in real time.

It’s not only external factors that have fuelled this growth however, and spreadbetting firms themselves have had a role to play. Spreadbetting is both cost-effective (E*TRADE only charges for each trade, regardless of volume, and there are no commissions) and it has low barriers to entry – with users effectively only needing an internet access and typically £30 to get started. In addition, increased competition in the market in the past two years has led to spreads tightening and minimum bet size falling, making the market even more accessible – and encouraging growth even further.

From an investor's perspective, spreadbetting offers the opportunity to invest in a wide and diverse range of activities; from buying UK and US stocks, to predicting the future price of oil, to trading currencies, to betting on closing price of the FTSE 100. In addition, they are given access to up-to-the-minute charts on all manner of company and economic data, to help them make better and more informed decisions.

There are also significant tax advantages to spread betting, which is obviously another attraction for investors. Spread bets and contracts for difference (CFDs) are both ways of gaining exposure to share prices without buying actual shares, and therefore both are exempt from the 0.5% stamp duty applied to share purchases. Also profits gained from spread betting are presently recognised as the winnings of a bet, and thus under current tax rules are not subject to capital gains tax or income tax – a compelling proposition for active traders.

So, all things considered this growth is not surprising, and one only needs to look at the hundreds of websites that cater to the online spread betting community which has proliferated in recent years, to see it for yourself. This growth is also reflected in E*TRADE’s 2007 trading figures: trading volumes increased by 140% per cent between Q1 and Q4 in 2007.

Looking at E*TRADE’s 2007 data more closely, customers gravitated heavily toward commodities, particularly in the second half of the year, as investor sentiment began to focus on the rapid price moves in this sector. Indices & exchange traded funds are also becoming more popular.

Interestingly in times of highly volatile markets, spread betting enables active customers to take advantage of price movements as a consequence of the gearing as well. Our trading oriented customers rely on volatility for returns and active traders have looked to leverage the considerable market swings in 2007 – particularly in the latter half of the year, as the credit crunch started to take full effect.

So the growth of spreadbetting is clear and compelling. While best suited for self-directed investors (it is important to consider the risks before jumping in and opening an account) spreadbetting is an additional investment tool that should be considered by people who prefer to manage their own risk, and ultimately reward.

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