Spread betting is a tax-free financial derivative that enables you to speculate on the price movement of a financial market, without actually owning the underlying asset. Instead, you predict whether the market’s price will rise or fall, and the degree to which you are right or wrong determines your profit or loss.
So, now we know that Spread Betting enables you to speculate on the movement of a particular asset, just like a currency pair, company stock or even an entire index, without actually owning the asset.
It’s slightly different from alternatives as CFD Trading and fixed-odds betting, because the size of your profit or loss is based on how much your chosen market moves. With fixed-odds betting, you have a simple win/lose outcome and a pre-defined payout or loss.
With financial spread betting, the outcome you’re speculating on is the direction in which the price of a financial instrument will move. If it moves the way you predict, your profit will grow the further it goes up. However, if the market moves against you, your loss will also increase as the price movement becomes greater. Betting on the price increasing is referred to as going long, while betting that it will decrease is called going short (or ‘shorting’).
Spread Betting on shares example
Say Apple is trading with a sell price of 135.05 and a buy price of 135.20. You anticipate that Apple shares are going to rise in the next few days due to a new product release tomorrow. You decide to go long on (buy) Apple shares for £10 per point of movement at 135.20.
After three days, Apple shares have indeed moved in your favour and increased to 135.50/135.65. You decide it’s a good time to close your trade. This means you’ll be coming out with a profit of (13550 – 13520) x 10 = £300, excluding any daily funding charges or overnight fees.
On the other hand, if you originally decided to sell Apple for £10 per point at 135.05 and then closed at 135.65, you would have ended up with a loss of (13565 – 13505) x £10 = £600. Once again, excluding any daily funding charges or overnight fees.
What is the spread?
Spread betting gets its name from the spread, or the two prices that are always wrapped around the underlying market price. The costs of any given trade are factored into these two prices (known as the offer and the bid), so you will always buy slightly higher than the market price, and sell slightly below it.
If the FTSE 100 is trading at 6545.5 and has a one point spread, for example, it would have an offer price of 6546 and a bid price of 6545.
When financial spread betting, you are placing a bet on whether the price of a financial instrument will move above or below the spread.
Reasons to spread bet
Spread betting is extremely popular in the UK because it’s tax free. You won’t have to pay any capital gains tax or stamp duty on your profits.
– Small margins. Spread betting is a leveraged product, which means that you don’t have to put up the full value of your position in order to trade. Leverage can make your investment capital go further, but if the market moves against you there’s a risk you can lose more than your deposit.
– You can short the market. As you are simply placing a bet on the direction in which an asset’s price will move, you can take a view on the markets that are falling as well as rising.
– Quick execution. You can open a spread bet almost instantly. In most cases you’ll simply pick your market, your bet size and whether you want to ‘buy’ or ‘sell’, and then hit confirm to open your position.
– Thousands of available markets. Most spread betting brokers like IG Markets offer spread bets on a huge range of markets, including forex, indices, shares, commodities, interest rates, options, digital 100s and more, all from one account. As you never own the underlying instrument, this means you’re able to deal on markets that you couldn’t otherwise access, such as whole stock indices.
– 24-hour markets. Most spread betting brokers like IG Markets offer round-the-clock dealing on most markets, meaning that you can open and close positions even if the underlying market is closed.
– No commission. In contrast to equity CFDs, there’s no commission to pay. Instead, the cost to open a position is contained within the spread.
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