Spread betting is a sought-after way of speculating on price movements in the financial markets. Through spread betting, you could access thousands of financial instruments, like forex, indices, shares, and commodities, without having to own the asset.
What also makes spread betting so popular is that it works on a margin basis, allowing traders to deposit only a certain percentage of the trade’s overall value. It gives traders more significant exposure to the markets through leverage.
For anyone looking to trade with leverage, it is essential to remember that even though your profits can be amplified, so can your losses.
But don’t worry; this handy guide explains everything about spread betting in more detail.
In this article
In simple terms, spread betting is placing a prediction on a particular financial asset rather than a win/lose bet. As mentioned above, the financial asset you’re trading can occur on various financial instruments such as forex, indices, shares, and/or commodities.
Unlike traditional investments, you only speculate if the price of a particular asset will go up or down instead of owning the actual asset.
With spread betting, if you predict the market will rise in value, you’ll buy (go long), or if you expect the market will fall in value, you’ll sell (go short). More on that later in the guide.
As traders won’t own the asset, spread betting is only tax-free in the UK and Ireland. This means traders don’t have to pay stamp duty or capital gains tax on their profits.
Within spread betting, you’ll find you have two prices for an asset: the bid price (which you can buy at) and the asking price (which you can sell at).
You’ll see a difference between the bid (sell) price and the ask (buy) price. That difference is called the spread; that’s the ‘commission’ you’ll pay the broker for the spread bet you might take.
As a side note, the broker you use will quote the two prices for the specific asset you want to trade.
If you want to place a bet, you just have to decide if the asset you’re looking at will rise or fall in value, then place the bets accordingly.
This is how it works in a nutshell. However, there are a few key concepts you’ll have to take into consideration concerning spread betting, and these are:
Let’s take a closer look at each of these concepts in more detail to understand why they’re essential.
As previously stated, going long refers to placing a bet when a trader predicts the market price will rise in value over a certain amount of time.
Going short refers to placing a bet when a trader predicts the market price will decline in value over time.
So, if the market is starting to rise in value, you could place a buy trade (going long), and if the market starts declining in value, you could place a sell trade (going short). Unlike traditional investments, which only allow for buy positions, this will enable you to bet on rising and falling markets.
Let’s use an example: you’re looking at GBP/USD, and you predict it will decline. You could open a bet to sell (go short) the currency pair. If the price goes up, you’ll potentially make a profit; however, if the price goes down, your position will be at a loss.
What does leverage mean in spread betting? The trader will be able to gain market exposure for only a small percentage of the total market cost of an underlying asset.
Let’s say you might be looking to spread bet GBP/USD, and you want to place a buy bet with a position value of £1000. Thanks to leverage, you’ll only need £33.33 of margin to place your bet. That’s because the leverage ratio is 30:1.
It’s crucial to remember that when trading with leverage, the profits can be magnified, but also the losses. It’s important to create a well-structured risk management plan.
In spread betting, margin refers to a deposit made by a trader into their trading account in order to maintain open positions. In spread betting, the two types of margins you’ll need to remember are:
Your margin requirement percentage for spread betting forex in the UK would typically be 3.33%. Always confirm this with your spread betting provider.
In spread betting, there are three main features you’ll need to remember:
Let’s look at each in more detail to better understand why these three features are important.
In spread betting, the difference between the ask (buy) price and the bid (sell) price is called the spread.
This is where the commission part of the broker comes into play. When looking at the prices of an underlying asset's market price, you’ll find that the ask (buy) price will always be slightly higher, and the bid (sell) price will be slightly lower.
The ask (buy) price and the bid (sell) price will differ for various instruments due to multiple factors that can influence the price, such as the liquidity and volatility of the instrument you might be looking to trade. The spread will fluctuate alongside the trading volume and price.
For example, GBP/USD trades at an ask (buy) price of 1.6015 and a bid (sell) price of 1.6014. The spread will come to 1 point.
The second key feature of spread betting is the bet size, which is the amount you want to allocate to the trade. In other words, the amount of money you wish to place on a trade.
Price movements are known as points. When trading an asset, your profit or loss is calculated based on the difference between the opening and closing prices, multiplied by the amount you invested.
The price movements of an underlying market are measured in points. A point of movement can represent a pound, a penny, or one-hundredth of a penny; this depends on the market you are speculating on.
But for this example, let’s stick to the one pound per point. If you decide to buy GBP/USD at £1 per point and it moves up with 40 points, you would make £40 (£1 x 40), but if it falls by 40 points, you would lose £40.
When discussing bet duration, it refers to the time within which you could decide to close your position. When spread betting, many tradable instruments have flexible time durations; this means you could close your position within the trading hours of the specific instrument.
So, you might decide to place a buy spread bet on GBP/USD at £10 per point, predicting the price could rise in your favour. The asking (buy) price is 1.0411, and the bid (sell) price is 1.0410, with one point for spread.
It’s essential to keep up to date with all economic news and data when moving forward with spread betting because many influences can move the market's prices.
Having a good, solid risk management plan is important, and it could assist in the dangers of the financial market. Regarding spread betting, a sound risk management plan could go hand in hand with a well-defined trading strategy.
This strategy could help you recognise low-risk entry points in the market, determine where to place your stop-loss and identify the areas where you could take profit. Combining these factors allows you to create an effective risk management plan to guide your spread betting activities.
One of the most important aspects is to keep losses to a minimum.
There are two ways you could do this.
You might need to become familiar with the type of market you could decide to partake in. You could become knowledgeable in various ways, such as looking at economic data and events, any important economic announcements that are known to move the market, and through chart review.
This is particularly helpful, as you could review recent and historical price movements.
Spread betting offers numerous benefits for individuals seeking to participate in financial markets.
Now that you’re equipped with everything you need to know, opening a spread betting account with Trade Nation is quick and simple.
*This is not financial advice, this article is solely for educational purposes. Spread betting is only available to residents of the UK and Ireland.
Yes, spread betting is only available for residents of the UK and Ireland. If you’re outside the UK or Ireland, you might want to look at Options, Futures, or CFDs.
This will depend on the broker you use. Every broker has their own deposit amount to start spread betting.
Depositing more than the minimum is wise to keep your account active.
Unfortunately, you won’t be able to spread bet without leverage because it’s an integral part of spread betting. Conducting thorough research with a comprehensive understanding of spread betting with leverage might be essential while developing a robust risk management strategy.
With that said, you could deposit more funds than required and bet with a tight stop-loss to limit the risk of losing.
To hedge in spread betting, you should open a position in the opposite direction to counterbalance negative price movements.
For example, if there's a buy position open on GBP/USD, but the market starts going down, you could open a sell position to counter the loss of the buy position.
Most often, the trade will end up in breakeven, so it’s important to keep your eyes on the market while the trades are open.
What can I spread bet on?
You have a variety of markets to choose from with spread betting; these include:
Could I profit from spread betting?
Yes, you could stand to profit only if your prediction of the market is correct. If you’re wrong, you’ll take a loss. Even though you could profit through spread betting, you’ll still have to remember your risk management plan and never risk more than what you could afford to lose when the market doesn’t go how you predicted.
What is the difference between spread betting and CFDs?
With spread betting, you’re placing a bet on the number of points you predict the market will move in the future. In comparison, CFDs (Contracts for Differences) allow traders to trade the difference in the price of an asset’s value from when it opened to when it closed.
How are spread bets taxed?
For the UK and Ireland, spread bets are tax-free. Any profits you could make are not subjected to capital gains tax, and you don’t have to pay stamp duty because you don't own the asset.
With that said, tax laws can change and will also depend on individual circumstances.