Spread Betting Guide
Richard Montana | October 21, 2022
What is Spread Betting?
Choosing a buy or sell position on a market allows you to speculate on whether the price of the market that you have chosen will rise or fall in value, using a stake size that you wish to trade. It is similar in some ways to CFD trading.
For every point that the underlying market price moves in the direction you predict, you will earn a multiple of your stake. However, if the market moves against your chosen position, you will lose a multiple of your stake for each point the market moves in the opposite direction.
Spread betting mimics the underlying asset and reflects the security that the spread bet is mirroring. For example, if we were to buy a spread bet contract on Amazon, then the price of the spread bet will rise and fall in line with Amazon’s share price.
Why do Traders 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.
Spread betting is a popular product for some traders for a variety of reasons. These include:
- Some potential tax benefits in the UK
- Can be commission free
- 24-hour trading
- Speculate on falling (go short) and rising (go long) markets
- Way to diversify a trading portfolio
- Spread bet with leveraged positions
Whilst spread betting is popular amongst traders, it is very common for traders to actually lose money when trading spread bets. Therefore, it is imperative to have a clear understanding of the significant risks involved with spread betting and learn as much as possible before you start.
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.
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.
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.
Choosing a Spread Betting Broker
There are various factors worth considering if you are looking for a broker to spread bet with. We will cover what we consider to be some of the most important aspects that you should be aware of when choosing a spread betting broker.
We consider broker regulation to be one of the most important things to look for. When using a regulated broker, you can get more protection than you would from an unregulated broker. Regulated brokers must comply with strict rules and regulations that are implemented in order to try and help protect investors.
Brokers can offer spread betting on a range of financial products such as Forex, Indices, Shares, Commodities, Futures, Options and more. If you are looking to trade a specific market, you would want to ensure that it is available for spread betting at the broker you are considering.
Spread bets do not always incur a commission fee as the costs can be incorporated into the spread itself. However, it is worth considering all of the broker fees involved and size of the spreads. Other fees can include funding fees, inactivity fees, platform fees and more. Make sure you have a clear understanding of all the potential fees involved. If you are looking to save as much as possible on your trading costs, you can take a look at our best discount brokers.
In order for clients to be able to spread bet online, the broker will provide them with a spread betting platform. There are various desktop, web and mobile trading apps available, some more user-friendly than others. Each platform will have a choose of trading tools, features and functionalities. If you are already familiar with a specific trading platform, you may wish to check that the broker provides it. Alternatively, you can opt for a popular and user-friendly spread betting platform such as MetaTrader or cTrader. You will find that there are lots of MetaTrader brokers which is gives convenient market access for spread betting online. If you don’t have the time or skills to trade and want to copy trading signals, you should look for a social trading platform.
Leverage enables you to get a much larger exposure to the market you’re trading than the amount you deposited to open the trade. Leveraged products, such as spread betting and CFDs, magnify your potential profit but also your potential loss.
For example, if you had an account balance of $100 and leverage of 1:5, you would be able to take a position size of $500 ($100 x 5 = $500).
Whilst this does mean that you can control a position size larger than you would have been able to without leverage, it also means the risk is significantly greater. It is imperative that you have a clear understanding of leverage and how it works before trading with leveraged positions.
The best spread betting brokers should have a selection of educational materials that are available to help traders increase their trading knowledge and skills. This can range from trading guides, tutorial videos, webinars, eBooks, quizzes and more. If you would like to learn more about spread betting, then you may wish to check that the broker has the relevant educational resources.
Most spread betting platforms will have an array of built-in trading tools to assist with market analysis. However, if you require any additional tools, it may be worth checking that they are provided by the broker. This can include economic calendars and earning reports for fundamental analysis which can be used to keep up to date with the latest market happenings. Other trading tools may include spread bet calculators, signals, market alerts and more.
Each spread betting broker will have its own minimum deposit policy so check that you can meet this requirement. You may also need to provide some personal information in order to pass the brokers KYC and AML procedures. During the sign-up process it is very important to make sure that you read all of the brokers terms and conditions, only proceeding if you understand and agree with them.
Each broker will have different account funding options. You should check that the broker has deposit and withdrawal options that are convenient for you. Payment methods can include wire transfer, credit/debit card along with online payment methods such as Neteller, PayPal and Skrill. It is also important to check if there are any broker or third-party fees that will be charged when making deposits and withdrawals.
It is always important to have good customer service that are readily available to answer your questions in a prompt and efficient manner. You can check where the broker is located and how good their responses are before opening a trading account. The majority of brokers will offer online chat, telephone and email support. You can check they have a contact method that is convenient for your needs.
Spread betting is a financial derivative that enables you to trade on the price movements of a wide range of markets. Unlike traditional investing, you don’t take ownership of any assets when spread betting – which means you can go short as well as long, take advantage of leverage and more.
Traders use spread betting to get a range of different benefits. Some, for example, will utilise spread bets to trade when markets are falling as well as rising. Others use them to diversify their exposure by trading FX, shares, indices and commodities 24 hours a day from a single account.
Now that you have had a brief overview of what spread betting is, you may be considering opening an online trading account to spread bet online. To do so, you can choose a spread betting broker, follow the account opening process and you will be able to start spread betting online through one of their spread bet platforms.
However, keep in mind that spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. A large percentage of retail investor accounts lose money when trading spread bets and CFDs. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Most experts would suggest trading on a demo account with virtual funds to begin with. If you are new to trading and need as much guidance as possible, you might want to explore our best brokers for beginners.
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.
Take your time to research brokers and do your own due diligence, the above information is only for educational purposes and not advice. Please feel free to view our best spread betting brokers if you need some further inspiration.
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