The art of speculating on asset prices has been around for centuries. From the days of the Dutch Tullip to the more recent internet stocks boom and bust, people have been willing and able to place bets on the outcome of financial events and fluctuations in the prices of stocks and shares, bonds, currencies, and the various commodities including gold and oil.

While the actual process of buying and selling financial instruments remains largely the same as it has always been, the instruments available to investors are constantly changing. Indeed, such changes or financial innovations as they may be referred to have been the bedrock of advanced economies with sound financial institutions.

In recent times, one of the most notable and innovative products to enter the private investor arena has been financial spread betting. This derivative instrument originated in the United Kingdom in the 1970s, and having started out as the preserve of financial wiz-kids, it has become a mainstay among private investors from all walks of life.

Essentially, a financial spread bet is no different from a derivative that moves in line with the price action of the underlying security, be that stocks and shares, commodities, various currency pairs, stock market indices, and government bond benchmarks.

The major advantage of financial spread betting as it is currently structured is the fact that profits are tax free. Of course, as the spread betting brokers are always quick to point out, tax laws are subject to change. But for now, the exemption from capital gains tax which can be as high as 40 per cent in the UK and Ireland makes this a potential lucrative and attractive vehicle for profitable short term traders.

The key word here is 'profitable' since freedom from capital gains taxation is irrelevant if you have no trading profits to protect. But for those who earn substantial returns on their trades, being able to keep a further 40% of returns is certainly a big advantage.

This tax-free attribute has meant that spread betting has enjoyed tremendous success and popularity in various jurisdictions including the UK and Australia.

Of course, despite its many advantages, spread betting remains a specialised activity that involves a high level of risk and, as a trader you may lose more than your original stake due to the leverage effect. Consequently, it is not suitable for everyone.

Moreover, spread betting is not always legal depending on your country of residence.