Financial Spread Betting came into existence back in the 1970's. Up until the 1990's it was predominately enjoyed by professionals working in the high-powered world of finance in London. However, as the world grew ever smaller through the emergence of the Internet revolution and its abundant flow of information, so too did the knowledge of financial spread betting spread like rings in the water.
Tax Free Trading
You have heard about it and you have read about it before, so I am not going to spend a lot of time dwelling on this point. All I need to state is that all your profits made through City Index are tax free. The tax laws may change in the future but so far financial
spread betting has existed for more than 30 years.
I think it is important to note though that if you do suffer a loss on a spread bet, you are not allowed to offset that loss against a profit you made on a financial product on which you have to pay capital gains tax (CGT). So if you have made £1000 on a physical stock, but you also had a loss of £500 on a spread bet, you can’t say to the Inland Revenue that you should only be taxed on £500.
Shorting
What does it mean to go short? It means that you are selling something you do not yet own because you think you can buy it back at a cheaper price at some point in the future. It may sound complicated but it is actually a very straight forward process.
A similar example would be if you go to a car dealer and say you would like to purchase a car of a specific nature. The car dealer doesn't have the car in stock at that moment in time, but he knows he can get hold of one for you. You decide upon a purchase price, let us say £20,000, and you pay for the car right there and then. You also agree that the car dealer has to provide you the car in 2 weeks time.
Now the car dealer is "short" one car, which he has to deliver to you. His profit depends upon how cheap he can purchase the car of your choice. If he can buy the car of your choice for £15,000, then his profit is £20,000 - £15,000 = £5,000.
If for whatever reason he has to pay £25,000 for the car, he will lose on this deal. Either way you get the car for £20,000, and the dealer’s profit/loss depends on the price he can purchase the car he has to deliver to you.
You may not realise this but "going short" actually has a very functional value in many areas of life.
If you are a farmer and you suspect you will have an unusually good harvest in for example wheat, you may want to "short" wheat contracts for delivery in the future. What you have essentially done is to remove the risk of price fluctuations between now and when you harvest your wheat. If you during the summer estimate that you will harvest 5 tons of wheat in October, when the harvest season is due, you have the ability to enter the wheat market (which is traded on commodity exchanges in the US) and sell your crop now.
You may question the reason for that. From the farmers point of view he may prefer to know now what price he can get for his 5 tons of wheat rather than waiting until October. He has hedged his exposure to wheat by selling short. In real life this means that in October he has to deliver 5 tons of wheat to whoever bought the contracts of him (although in practical term this is done through a central clearing house so the farmer doesn’t have to deal with individual customers).
You may also ask who would want to buy 5 tons of wheat of the farmer. This could be any number of flour mills who are looking to stock up on inventories. They can then secure a steady supply of wheat throughout the year by buying wheat on the exchanges for delivery when they need it.
You may be sitting thinking that you don't want to speculate in wheat or any other commodity through
City Index because you don’t want to wake up one morning to a knock on your front door from someone who wants to deliver 5 tons of wheat to you.
Rest assured that when you trade commodities through City Index you do not "take delivery" of the commodity. You purely speculate on the direction of the commodity, whether it.
