Spread betting is slightly different from other forms of investment, such as buying stocks or trading in currencies. It is a derivative, which means that you won’t actually be buying any of the underlying asset. Instead, you will be making an agreement with your broker where the amount you win or lose depends on the movement in the underlying market.
Spread betting is a derivative that allows you to bet on whether a specific stock, currency pair or other asset will rise or fall. If you correctly predict the direction of movement, you will make money for each point that the price moves in that direction. However, if the price goes the other way, you will lose money for each point of movement. The amount that you win or lose will therefore depend on how much the value of the underlying asset changes. Unlike fixed odds betting, there are no defined payouts or losses for spread betting.
When you are spread betting, you will be trading in pounds per point rather than shares bought. You won’t actually need to buy any of the shares or other assets that you are speculating on. You can bet on the price movements of many different financial markets, including stocks, bonds, options, interest rates, commodities, currencies, and indices such as the FTSE 100.
In order to start spread betting you will need to open an account with a broker. You will also need to decide which market you want to trade on and what kind of trade you want to make. You will choose a specific share, currency pair or other asset and predict whether its value will increase or decrease.
Spread bet markets have two prices for each share or asset. The bid price is the price at which the asset can be sold. The offer price is the price for which it can be bought. The actual market price is in between these two. If you think that the price is going to increase, you will bet at the offer price. If you expect the price to decrease, you will bet at the bid price, which is lower. Betting that the price will go down is also known as going short.
When you place the bet, you will also need to decide on the size of your stake. You will win the stake amount for every point that the market moves in your favour. You will lose the same amount for every point that it moves against your prediction. For example, if you have a £5 stake on a specific stock and you’re betting the price will rise, you’ll earn £5 for every point or penny the price goes up above the offer price you paid. You’ll lose £5 for every penny the share goes down below the price you paid, which was the offer price. If you are going short, the reverse is true.
You will need to monitor your gains or losses once the trade has been made in order to decide when to close the bet. It is also possible to add a stop loss or limit to the order. The bet will then be closed automatically if the price moves too far against your prediction. Setting this up can limit the amount you can lose on the bet.
The term spread betting comes from the spread, which is the difference between the bid and offer prices when you are buying an asset such as shares. The bid price at which you can sell shares is just below the market price. The offer price at which you can buy them is just above. The size of the spread can vary, but it is very important. With spread betting, you will need the market price to move beyond the spread in the direction you have predicted before you can make any money.
If you’re predicting the price will rise, you will make a bet at the offer price. You will therefore only make money when the price rises above the offer price. If it exceeds the market price without passing the offer price, you won’t make a profit. You will actually be making a loss because of the stake you have put in.
Similarly, if you’re betting on a decrease, you’ll make a bet at the bid price. You’ll only make a profit if the market price drops below the bid price. If the market price remains above the bid price or starts to move up, you’ll make a loss.
What this means is that the market needs to move in your favour just in order for you to break even. If you place a spread bet on a share that is trading at 100p with an offer price of 101p, you will need the market price to rise by a penny to avoid a loss. You will only make money if it rises above 101p. However, if the market price drops by a penny to 99p, you will lose twice your stake because you made your bet at 101p. If it remains the same, at 100p, you’ll be losing your stake.
Spread betting is a leveraged product, which means that you will be able to bet more than the amount of money you put into your trading account. The amount you need to deposit to make the trade is known as the margin. The margin requirement is a percentage of the total cost of the trade, which is the price of the asset multiplied by the stake amount.
Normally, if you want to buy shares in a particular company, you would need to pay your broker the entire amount. In order to buy 1000 shares at 100p each, you would need to give your broker £1000. If the share price then rises by a penny, the value of your shares will go up by £10.
If you are spread betting, you could bet £10 per point to get the same return for each penny that the share price rises. However, rather than give £1000 to your broker, you will only have to pay the margin. For a 5% margin requirement, this would be just £50.
Riskier markets usually require higher margins for spread betting. You will also be required to keep a certain amount in your trading account while the bet is open. If your funds drop below this, the bet will be automatically closed by the broker.
Leverage enables you to make larger bets, which have the potential to produce bigger returns, but it also means that your losses will be magnified. You could actually lose more than your initial stake and end up owing your broker money, which couldn’t happen with a conventional stock investment.
Spread betting presents the same risks as a direct investment in the underlying market. Predicting the direction of movement will be just as hard as choosing a stock that will rise. You will need to understand the market you are betting on and consider all of the factors that could affect it. If you are spread betting on the stock market, you will also miss out on any dividends that might be paid as you will not actually own any of the stock.
It is also important to understand what the spread means for your bet. Since you will be betting on the bid or offer price, you will begin at a slight disadvantage. The market will need to move in your direction just in order for you to break even.
Choosing a leveraged product presents another risk. Since you are borrowing money to invest, you can end up owing your broker more than the original stake or margin you place into your trading account. The risk can be limited by issuing a stop order to close the bet if the market moves too far against you.
Spread betting has an important advantage over most other kinds of investment in the UK. You won’t have to pay any stamp duty or capital gains tax on the profits that you make. Since spread betting is also usually commission free and only requires a small deposit due to leveraging, it can therefore be a low cost option for investors.
As with any other form of investment, several different approaches can be used for spread betting. The fact that you can trade on a wide variety of markets makes it a particularly versatile option. However, it is important to understand the market you have chosen and to check what units you are betting in. One point of movement in the right direction will win you your stake, but the points used for different markets can vary. If you are betting on shares, one point is usually a penny, but a point will usually be 0.1 if you are betting on gold.
