Spread Betting
What is it?
Spread betting is a way of playing the financial markets without actually buying any shares. Instead you are betting on whether the market or share price will move up or down.
How is it different from normal betting?
In normal betting you have fixed odds. For example, you might bet £10 on Brazil winning the World Cup at odds of 5-1. If they win, you receive £50 (and get your stake money back). If they don’t win, you lose your £10. In spread betting, the trader is given a ‘spread’ and has to choose whether the outcome will be higher or lower than the spread. How much you win or lose depends on exactly how the market has fared.
Okay, so what’s a ‘spread’?
Let’s say you want to speculate on Virgin shares. The bookmaker gives you a spread of £1-£1.01. If you think the share price is going to rise you can ‘buy’ (it’s also called to ‘go long’ or to take an ‘up bet’). If you think it will fall you can ‘sell’ (‘go short’ or ‘down’ the bet). The low end of the spread (£1) is the ‘bid price’. The high end of the spread (£1.01) is the ‘offer price’. You always sell at the bid price and buy at the offer price.
So I can make money even when the markets are going down?
That’s right, which is one of the reasons why spread betting is so popular.
What are some other advantages?
Well, it’s tax free; there’s 24-hour trading in most markets; and you can start off very cautiously with a minimum stake of as little as £1. Check out the Financial Spread Betting comparison table to compare the service offerings, including minimum stake, 24-hour markets and currencies.
How do I make money?
Let’s take the example of the Virgin shares and assume you placed £10 on the shares going up in value. Let’s say the shares strengthened and the new spread is now £1.11-£1.12. You decide the time is right to sell. So you sell (at the new bid price). You bought at £1.01 and sold at £1.11. That’s a difference of 10p which means you have earned 10 points. You staked £10 so you get £10 for each point, making a win of £100.
What if I had held on and sold when the shares went even higher?
Then you would have made more money. Let’s say you sold when the spread was £1.25-£1.26. You would have bought at £1.01 and sold at £1.25 – meaning a difference of 24p (24 points) and a win of £240.
And what if I had staked more money?
In our example, you staked £10 and earned 10 points which translated to £100. If you had staked £20 and earned 10 points you would have won £200.
And how do I lose money?
Let’s say you had predicted the Virgin share price would fall so you ‘went short’ with a stake of £10. You decide to cut your losses when the spread goes up to £1.11-£1.12. You ‘sold’ at the original bid price of £1 and buy back your short at the new offer price of £1.12, meaning a loss of 12 points. You lose £10 per point, meaning a loss of £120.
So if I had staked more money, my losses would have been greater?
Afraid so.
What can I spread bet on?
Many things including shares, currencies, commodities (such as gold) and the FTSE. Review the trading opportunities offered in the Financial Spread Betting comparison table where you can compare the markets of the main protagonists.
How long do the bets last?
There are two main types of spread bet; one is short term and the other is long term. The short term bet is the most popular. Let’s say you bought gold on Monday morning. You could sell Monday afternoon if you wanted. But you could have a ‘rollover’ into Tuesday and keep rolling over. These daily bets have narrower spreads but you’ll probably have to pay a small financing charge each time the bet is rolled over to the following day.
Long term bets…. These could last a whole quarter. The spread is wider but there are no overnight charges.
You will usually be able to have the rolling daily bets and the quarterly bets on the same markets.
Can I put something in place to make sure I only lose a certain amount of money?
Yes, the ‘stop loss order’. You can set one up for free and the spread betting company will attempt to put it into action when the market goes sufficiently against you. The only problem is that it may not be activated straight away if the market is moving very quickly. This means your losses could be higher than you had bargained for. You can have a guaranteed stop loss order – but this will cost you in terms of a wider betting spread. Compare Financial Spread Betting companies for their position on stop losses in our Financial Spread Betting comparison table.
You said spread betting is tax free. Is that right?
It’s classed as gambling so winnings are exempt from capital gains tax. They are also exempt from income tax as long as you can prove you have another source of income.
How does the bookie earn money?
The spread is effectively a commission or fee because you must buy at the high end of the spread (the offer price) and sell at the low end of the spread (the bid price). The wider the spread, the bigger the commission. Use our Financial Spread Betting comparison table to understand which company has the tightest spreads.
Okay, but give me an example.
Let’s say two people are betting on the FTSE and the spread is 1000-1002. One trader ‘goes long’ with a stake of £10 and one ‘goes short’ with a stake of £10. Let’s say the FTSE spread falls to 990-992. The trader who went long bought at the offer price of 1002 and sells at the new bid price of 990 – meaning a loss of 12 points and £120. The trader who went short sold at the original bid price of 1000 and bought at the new offer price of 992 – meaning a gain of eight points and £80.
The broker receives £120 and pays out £80 meaning a gain of £40. The bookies will make a commission as long as there is roughly an equal amount of money either side of the spread.
Wouldn’t they have still made money if there was no spread?
No. Let’s say the FTSE was being bought AND sold at 1000. It goes down 10 points to 990. The trader who went long with a stake of £10 loses 10 points and £100. The trader who went short with a stake of £10 gains 10 points and £100. It’s a stalemate because the broker pays £100 but also loses £100.
If I make a bet of, say, £100 do I have to pay that money to the broker at the time when the bet is accepted?
No. But you will have to provide a deposit.
How do I get started?
There are plenty of online brokers with whom you can open an account.