well with spreadbetting you never actually own a share, you just bet on the price movements on that share. plus you can lose everything if you dont have the funds to keep the margin open
Yes - you own units in a fund which owns the assets. You are investing indirectly in such assets and not directly. However with unit linked funds (unlike, say, tracker bonds) you normally benefit from dividend payments on the assets which are reinvested within the fund.Am I correct to say when you invest in a fund you don't actually own any shares in any of the companies that compose the fund?
Is it relevant to consider the different tax treatment of spread betting and indirect equity investments? Perhaps it has been done in other threads on this subject?
I think so it as affects your profits. Is there any downside to this approach? If not why don't more people do it?
The major downside of your strategy as far as I can see is the margin requirements. If a fund loses 5% and then subsequently gains 10%, you're up 4.5%. However, with spreadbetting in the same scenario, it is possible that the loss exceeded your margin cover and you will have missed out on the subsequent rally.
If you provide a bigger margin cover to prevent this, then that money is simply sitting in your spreadbetting account earning no interest (losing value in real terms).
The problem is, as with any borrowing, there is a hidden cost with the leverage which is factored into the spread-bet quote. Typically the leverage works out at LIBOR+2% at minimum which can be intuitively seen by considering that the FTSE spread-bet quote will be above the actual current FTSE level. This converges towards the actual level over the period of the bet. This is expensive - so the apparent free lunch is not so free and, personally coupled with the fact that your bet is constantly marked-to-market, I have come to the conclusion that long-term index tracking is not best achieved using spread-betting.
I looked at a similar scenario when trying to create my own index tracker for the FTSE. If it's at 6000 and I bet 3euro/pt, I've gained exposure of 18000euro. As I'm a conservative investor, I then place 9000euro on deposit with the spread-betting company to cover most collapses in share prices (up to 50%). Great - I appear to have gained 2:1 leverage for very little cost (i.e. mainly the lost interest on my 9000euro deposit + low annual spread commission) of maybe 2% of 18000.
The problem is, as with any borrowing, there is a hidden cost with the leverage which is factored into the spread-bet quote. Typically the leverage works out at LIBOR+2% at minimum which can be intuitively seen by considering that the FTSE spread-bet quote will be above the actual current FTSE level. This converges towards the actual level over the period of the bet. This is expensive - so the apparent free lunch is not so free and, personally coupled with the fact that your bet is constantly marked-to-market, I have come to the conclusion that long-term index tracking is not best achieved using spread-betting.
If the FTSE rises by X%, the bet will rise by <X% over the bet period. I didn't read that on the DI website.
When I use the phrase "mark-to-market", I'm referring to the fact that, as with margin purchases, your position is constantly being monitored for solvency. i.e. if the market falls 15% and your min margin requirement has been breached, your position will be closed. This can be contrasted with investing with borrowed money.
Another point here is that SB companies only offer short periods (often max 3months) to keep the profits rolling in..
Claiming euro bets to be an advantage could be slightly misleading since effectively it's removed foreign currency exposure . . . With SB, no choice is offered to the investor.
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