What is Spread Betting & How Does it Work?
In this article, we cover everything you need to know about what spread betting is and how it works.
Table of Contents
Spread Betting Explained
What is spread betting? Spread betting is a form of speculation that involves placing a bet on the price direction of a financial instrument. Your profit, or loss, is determined by whether or not the market moves in your chosen direction.
Unlike other forms of trading, a spread betting trader never owns the underlying product - they merely speculate on whether the price will go up or down in value. As spread betting is a leveraged product, spread betters can trade on margin. This means you only need a small deposit of the overall value of the trade to open a position.
Let's take a look at the mechanics of a spreading betting trade and how it works.
How Does Spread Betting Work?
To learn more about what is spread betting, it's important to understand the components of how spread betting works. There are three main components that make up a spread betting trade:
- The direction of the trade
- The spread of the instrument
- The bet size of the trade
Every spread betting trading ticket gives you the option to either go long (buy) or go short (sell), on a financial instrument. If you believe the market is going to rise in value, you would open a long position. If you believe the market is going to fall in value, you would open a short position.
The spread betting trading ticket will give you the price at which you can buy at, and the price at which you can sell. The difference in these values is known as the 'spread'. Essentially, this works out to be the cost, or commission, on your trade.
Each spread betting trading ticket requires a bet size, or 'stake' size. The bet size is important as the value is multiplied by every point that price moves in your favour - or not - to determine your profit or loss. To see the best way how spread betting works, let's look at a full spread betting trading example.
Spread Betting Stock Market Indices
In this example, we will go through spread betting stock market indices using a long trade on the FTSE 100 stock market index as an example. Let's assume the underlying market price of the FTSE 100 stock market index is 6500. With a broker applied spread of two points, you can sell at 6499 and buy at 6501. You believe the stock index is undervalued and is set to rise. You enter a spread betting stock market index buy trade, or long position, on the FTSE 100 for £5 per point at 6501.
- Scenario 1: A Winning Trade
The FTSE 100 index does indeed rise to 6595, where you decide to close your position. Your broker is now quoting a buy price of 6596 and a sell price of 6594 (a two-point spread). To exit a spread betting trade you must do the equal and opposite trade. This means you sell your £5 per point position at a price of 6594.
The difference between your exit price and entry price is 93 points (6594 - 6501). To calculate your profit in your spread betting account, you simply multiply your bet size by the number of points you have gained. In this example, £5 per point multiplied by 93 points profit, equals a total monetary profit of £465.
- Scenario 2: A Losing Trade
If the FTSE 100 index does not rise and instead falls to 6400, whereupon you decide to cut your loss and exit the trade. Your broker is now quoting a buy price of 6401 and a sell price of 6399 (a two-point spread). To exit a spread betting trade you must do the equal and opposite trade. This means you sell your £5 per point position at a price of 6399.
The difference between your exit price and entry price is -102 points (6399 - 6501). To calculate your loss in your spread betting account, you simply multiply your bet size by the number of points you have lost. In this example, £5 per point multiplied by a 102 point loss, equals a total loss of £510.
In both scenarios, there will be additional funding charges if the position was kept open overnight and the spreads will vary depending on which financial instrument you are trading and the time of day.
As there are other markets available to trade in a spread betting account, let us look at what is spread betting forex.
What is Spread Betting Forex?
In this example of what is spread betting forex, we will use a short trade on GBPUSD. Let's assume the underlying market price of GBP/USD is 1.5000. Every market listed in a spread betting account is listed in points. This means your broker's price of GBP/USD is 1.5000. With a broker applied two-point spread (as an example), you can sell at 1.4999 and buy at 1.5001. You believe the currency is set to fall, and enter a sell order, or short trade, for £3 per point at 1.4999.
- Scenario 1: A Winning Trade
GBP/USD does indeed fall to 1.4950, where you decide to close your position. Your broker is now quoting a buy price of 1.4951 and a sell price of 1.4949 (a two-point spread). To exit a spread betting trade, you must do the equal and opposite exchange. As you initially sold GBP/USD at £3 per point, this means you buy GBP/USD at £3 per point at 1.4951.
The difference between your exit price and entry price is 48 points (1.4951 - 1.4999). To calculate your profit in your spread betting account, you simply multiply your bet size by the number of points you have gained. In this example, £3 per point multiplied by a 48 point profit, equals a total profit of £144.
- Scenario 2: A Losing Trade
GBP/USD rises to 1.5050, where you decide to close your position. Your broker is now quoting a buy price of 1.5051 and a sell price of 1.5049 (a two-point spread). To exit a spread betting trade you must again do the equal and opposite exchange. As you initially sold GBP/USD at £3 per point, this means you buy GBP/USD at £3 per point at 1.5051.
The difference between your exit price and entry price is -52 points (1.5051 - 1.4999). To calculate your loss in your spread betting account, you simply multiply your bet size by the number of points you have lost. In this example, £3 per point multiplied by a 52 point loss, equals a total loss of £156.
In either scenario, there would be additional funding charges if the position was kept open overnight, and the spreads will vary depending on which financial instrument you are trading and the time of day.
Now you have seen spread betting forex explained and know a little bit more about what is spread betting forex and indices, let's look at your ultimate guide to spread betting the global financial markets, as well as answer the hypothetical: can you do spread betting for a living and is spread betting profitable?
Your Guide to What is Spread Betting UK
Spread betting is just one type of trading vehicle among many (such as CFD trading, options trading, and so on).
Choosing The Best Spread Betting Platform
When trying to find the best spread betting platform it is important to remember that most spread betting UK companies have their own unique platforms that vary from one another.
This can make it a bit tricky for new traders trying to 'learn their craft'. After all, you want to spend your time learning about the markets rather than trying to figure out how to use an individual platform.
Having said that, there are some key details you should look for when trying to identify the best spread betting platform, such as:
- Is the provider of the spread betting platform regulated? An approved FCA spread betting provider is one of the highest regulations available from the UK's financial regulator - the Financial Conduct Authority.
- Do they allow you to start with a spread betting demo account? Some providers do, but not all. However, check when they expire as many only offer them for just a few days. They may also have limitations on which markets are available in the spread betting demo account.
- Do they offer access to other trading vehicles? As you develop as a trader, having access to other financial trading vehicles may be useful. For example, a serious forex trader may want to access the interbank FX market through an ECN account so they can trade directly with other banks - rather than against their broker. An investor may want access to a CFD trading account for its hedging capabilities.
Having the right trading tools available to you is essential - especially for those who try to do spread betting for a living. For these traders, some of the most commonly asked questions are: is spread betting taxable and is spread betting profitable which we look at in the next section.
Is Spread Betting Taxable?
For spread betting UK residents, one of the main advantages is that profits may be tax-free. However, tax treatment depends on individual circumstances and tax laws are subject to change.
Having said that, UK spread betting accounts are exempt from stamp duty and capital gains tax (CGT) within the UK. As spread betting profits are exempt from CGT, it does mean that you cannot offset any losses for tax purposes (unlike CFD trading accounts).
*Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
Is Spread Betting Profitable?
The reality is that some traders will make spread betting profitable for them, and some traders will not - it really depends on the individual. However, there are certain practices that traders may consider when striving for profitability. These include:
- Have a trading plan - With over 3,000 markets to trade, opportunities can be plentiful, but only for those who have a focus. Will you be focusing on forex, stocks, indices, commodities, or a combination of them all? Master a few, rather than scratch the surface of many.
- Test your trading strategy - There are many different trading styles, indicators and strategies to choose from. Having the ability to test them in a risk-free environment is essential to building confidence and longevity in your trading career. Whether it is a spread betting demo account or a CFD demo trading account it is important to get started on one.
Conclusion
Spread betting is a form of speculation. If a trader believes the market is going higher they would enter a buy, or long, position. If a trader believes the market is going lower they would enter a sell, or short, position. In a spread betting trading account your profit, or loss, is determined by how many points the market moves in your favour or against you. This amount can then be multiplied by the trader's bet size (for example £5 per point), to calculate a monetary profit or loss.
Spread betting UK accounts are exempt from stamp duty and capital gains tax. However, tax treatment depends on individual circumstances and tax laws are subject to change. You cannot offset any losses for tax purposes in a spread betting UK account, unlike a CFD (Contracts for Difference) trading account.
A CFD account also provides access to ECN pricing from a broker's liquidity providers and the interbank market. For example, the Admiral Markets Zero.MT5 CFD account offers ECN-style pricing, resulting in lower spreads from the interbank market and charges a commission per trade.
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