How To Spread Bet
Welcome to Trading Brokers step by step guide to spread betting online. Here you will find an easy to understand explanation of spread betting. This includes how to spread bet online, what you need to spread bet and how to open a trading account with a broker so that you can start spread betting online today.
Maybe you have heard of spread betting online or through a friend. Perhaps you are looking to spread bet and are curious about the different options available to you. Whether you are looking to speculate, invest or just learn more, this guide on how to spread bet can help you along your journey. Before we continue, it is important to acknowledge that spread betting is illegal in some countries, including the United States, meaning that US residents are not allowed to spread bet.
What is spread betting?
Spread betting is known as a derivative product, which means that instead of taking ownership of the underlying asset, you are just speculating on the direction in which you think the price of the underlying asset will move, either up or down, using the prices offered by a broker. If your prediction is correct and the asset does move in that direction, you could make a profit. On the other hand, if the price moves against your prediction, you would incur a loss.
There are spread betting brokers with whom you can speculate on a wide range of financial markets, including forex, indices, commodities, stocks, shares and bonds. As you do not actually take ownership of the underlying asset, you are able to trade markets that are falling as well as rising. Being able to trade in both directions can give the trader a wider range of opportunities than the more traditional buy and hold style of investing.
Financial spread betting operates in a similar manner to CFD trading except that you bet “x” amount per point on the assets price movement (either up or down) and then pay or receive the difference between the opening and closing price of the bet.
ASIC, BVI, CBI, FFAJ, FSA, FSCA
Min $100 Deposit
FCA, CFTC, NFA, BaFin, FINMA, ASIC, FMA, MAS, FSA, FSCA, DFSA, JFSA, METI, MAFF
Min $250 Deposit
ASIC, FCA, DFSA, SCB, CySEC, BaFin
Min $200 Deposit
ASIC, CySEC, IFSC
Min $5 Deposit
How does spread betting work?
As in stock trading and forex trading, there are two prices that are quoted for spread bets. There is the price at which you can buy (bid price) and the price at which you can sell (ask price). The difference between the buy and sell price is commonly known as the spread. The majority of spread-betting brokers make a profit from this spread, which often means that spread bets can be made without commissions. The costs of any given trade are usually already factored into the bid and ask prices, so you will always buy slightly higher than the market price and sell slightly below it. If the FTSE 100 is trading at 6535 and has a one-point spread, for example, it would have an offer price of 6536 and a bid price of 6545.
Investors would choose to align themselves with the bid price (buy) if they thought that the underlying market will rise. On the contrary, they would go with the ask price (sell) if they were under the impression that it will fall. Some of the key characteristics of spread betting include the ability to use leverage, the capability to go both long and short, along with the wide range of markets available and potential tax benefits.
As an example, if a trader thought the gold price was going to fall, they may decide to place a spread bet to sell the underlying market, which is gold in this instance. The outcome of the trade will depend on if the prediction is correct. If the gold price did decline, the short spread bet would be in a profit minus any broker fees. However, if the price of gold increases, they position would make a loss and still incur any fees.
Leverage is one of the key factors of spread betting, as it enables traders to gain an increased market exposure for a fraction of the underlying market cost. Whilst this does increase profit potential, it also significantly increases the risk and potential loss. It is of the upmost importance that anyone looking to spread bet with leverage has a clear understanding of how leverage works and the significant risks involved.
As an example of leverage, let’s consider a trader who wanted to open a position on Amazon shares. As an investor that would usually mean having to pay the full cost of the shares upfront. Although if you decided to spread bet with leverage of 1:5 on Amazon shares instead, you would only need to put down a deposit worth 20% of the cost.
When traders open a spread betting position, they would put down a small initial deposit known as the margin. This is a percentage of the full value of the trade and why leveraged trading is sometimes referred to as ‘trading on margin’.
You can choose your bet size which is the amount you bet per unit of movement of the underlying market. Any profit or loss is calculated as the difference between the opening price and the closing price of the market being traded, multiplied by the value of your bet.
If you were to open a £3 per point bet on the FTSE 100 and it moves 60 points in your favour, your profit would be £3 x 60 points = £180. If it moved 60 points against you, you would lose £180.
The bet duration is the length of time before the spread betting position expires. All spread bets have a fixed timescale, but these can range from a day to several months away. You are, however, free to close them at any point before their allocated expiry time, assuming the spread bet is open for trading.
Why spread bet?
Spread betting allows traders to buy or sell a huge range of markets, across various asset classes and with leveraged positions. There are usually no commission fees as spread betting companies tend to make their profit from the spread between the buying and selling prices. There can also be some tax benefits to spread betting depending on the trader’s location. However, it must be emphasised that spread betting is illegal in some countries and considered very risky. If you don’t understand a financial product you should get independent financial advice before you invest in anything.
How to spread bet online?
If you have taken the time to read through the above, you should hopefully have an understanding of how to spread bet. Here is a summary of the key steps:
1. Decide if spread betting is for you
Spread betting online carries an element of risk and can take more time than other forms of trading online. You will need to research products, manage your spread bets, follow market news and decide how to react to it. It is important to understand the risks and dedication that comes with spread betting online.
2. Educate yourself
Before spread betting, it is imperative to learn as much as possible about it. Any mistake could prove to be costly. There is an abundance of free educational materials provided by many online brokers that can help you to improve your trading skills and knowledge.
Most spread betting brokerages will also provide a free demo trading account so that you can practice spread betting online with virtual funds in order to familiarise yourself with the trading platforms and practice your trading strategies until you feel confident enough to open a real trading account.
3. Choose a spread betting broker
In order to spread bet online, you will need a broker account and trading platform to execute your trade positions through to the markets. When choosing a broker, there are a few important things to consider such as regulation, commission fees, platforms, tools, education, funding options and customer support.
If you do not have the time to research brokers, you can see a list of our best brokers that we have already prepared to help traders. If you would like to know more, you can also view our detailed guide on how to choose a trading broker.
4. Research products
If you have made it this far then you may be ready to start spread betting online! The next step is to research the different markets to discover which you have an interest in trading. Perhaps there is a particular industry, product or service that is already of interest to you. Many brokers will allow you to filter markets according to various criteria in order to narrow down your search if need be.
Many traders will begin by analysing different markets, studying public information such as finances, earnings and reports from professional analysts. The best brokers should have this information conveniently displayed for you within their trading platform.
5. Have a spread betting plan
Some of the most important factors that can help determine spread betting performance can be the trading plan and discipline. It is important to have a solid trading plan personalised to your own needs that includes the money management and trading strategy that you will use. Most experts and professional traders would try to not let negative emotions such as fear, anger and greed affect their trading strategy.
6. Spread bet online
Once you know what markets you want to trade online, you can analyse them to help decide if and when you will place your spread bets. After placing a spread bet, you will need to keep track of how it performs and manage it according to your trading plan.
Is spread betting right for me?
Spread betting is a popular choice for active investors who would like to trade a range of different markets both short (sell) and long (buy), without actually owning the underlying asset.
Spread betting can be suitable for scalping, day trading and swing trading. Traders who would usually trade CFDs, trade futures, trade ETFs, trade options, or trade bonds, may look to diversify their portfolio.
However, it is important to understand the significant risks involved with spread betting online, especially when using leveraged positions. Most experts would suggest trading on a demo account with virtual funds to begin with.
This can be a useful way to familiarise yourself with how to spread bet and using trading platforms whilst allowing you to practice your trading strategies until you feel confident and produce consistent results. Most trading brokers provide unlimited demo accounts free of charge.
Not sure which spread betting broker to trade online with?
If you are still unsure which spread betting broker is the best for you to trade online with then you can use our free online broker comparison tool to quickly compare brokers based on regulations, minimum deposit, leverage, spreads, commissions, funding options and more. You can also read our broker reviews and choose from our best brokers, best trading platforms, best copy trading platforms, best social trading platforms and best trading apps. If you would like to look for the best trading brokers in a particular country, we have pages dedicated to our best brokers USA, best brokers UK, best brokers Australia, best brokers South Africa and best brokers Canada.
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