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Does Spread Betting Mean You Don’t Receive Dividends?

Posted on | August 23, 2013 | 10 Comments



While spread betting isn’t available in all regions, most notably the United States, it is an extremely popular product, offering a very different way of trading. Brokers such as Alpari offer it from as little as 10p per point, making it open to just about anyone. However, there’s a very common misconception that when spread betting, because you don’t own any of the underlying asset, you receive none of the benefits normally associated with ownership, including dividend payouts. In reality however, you do receive dividends on spread bets, it’s just handled in a slightly different way. Some would argue that this method is even more beneficial than a traditional issue into your dealing account.

Generally, dividends are automatically incorporated into a spread bet’s price on the day before the ex-dividend date, at the close of business. With most other products, the dividend value would go directly into your account. The main benefit of this is speed. It can take as long as two months for dividends to appear in your account in a normal scenario, but this is instant. Everything is dealt with day-to-day.

When spread betting, if the dividend is directly deposited into your account, you do not receive the full dividend amount, though this isn’t necessarily a negative thing.

Taxes

In the majority of countries where spread betting is popular, including the United Kingdom, this form of financial trading is classified as gambling, and is therefore tax free. Dividends are normally subject to capital gains tax, but because in this scenario they are incorporated into the price of a gambling product, they are not.

The proportion of the dividend you actually receive is usually in the region of 80 to 90 percent, and will vary on the broker that you use. The difference between the full amount and what you actually receive is taken by the broker, but in reality this is paid out again by them in taxes. The idea of this 10 to 20 percent is that it discourages tax avoidance.

Examples

Here’s an example of how a dividend might benefit you if incorporated into the price of a spread bet:

  • You open a buy position at £10 per point for Company X’s shares
  • The shares are discounted to 250p because of a dividend
  • You then sell shares at 300p
  • This means you earn £10 for each of the 50 points
  • Technically, no dividend was received, but you earned an additional £500 because one was issued.

Here’s an example of how an issued dividend would benefit you in a spread bet if deposited into your account:

  • You open a £10 buy position with Company X
  • Company X announce a £0.04 dividend
  • Your £10 bet is the equivalent of owning 1000 of Company X’s shares
  • £0.04 per 1000 shares means a dividend of £40
  • Your broker issues 80%, giving you £32

It’s essential that you understand how your broker deals with dividends, as they can have a large impact on the success of your positions.

Category: General Investing