Spread betting — what is it and how does it work?

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.

If you want to learn more about spread betting tax in the UK, you can click here.

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 whether the asset you’re considering will rise or fall in value and then place the bet 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:

• Going long or short
• Leverage
• Margin

Let’s examine each of these concepts in more detail to understand why they’re essential.

Going long or short in spread betting

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.

Leverage in spread betting

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, profits can be magnified, as can losses. Therefore, it’s essential to create a well-structured risk management plan.

Margin in spread betting

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:

• The deposit margin is an amount the trader feels comfortable with to fund the spread betting account in order to execute trades.
• The second one is maintenance margin; this is a top-up deposit to avoid a margin call should your initial deposit not be enough to cover potential losses. You’ll receive a margin call stating that you need to add funds to your account to avoid your position getting closed automatically. Each spread betting broker has their own required percentage of free margin requirement.

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:

• Spread
• Bet size
• Bet duration

Let’s look at each in more detail to better understand why these three features are important.

What is the spread?

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.

What is the bet size?

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.

What is the bet duration?

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.

• Winning trade: You were right in your predictions, and the price rose to a new ask (buy) price of 1.0471 and a new bid (sell) price of 1.0470. You could decide it’s time to get out and close your bet at a sell price of 1.0470. The market moved up by 60 points because you bought at 1.0411 and sold at 1.0470. Multiply the amount you placed and multiply by the number of points it moved (£10 x 60), and you get a profit of £600.
• Losing trade: In this case, you were wrong, and the market fell by 60 points with a new asking (buy) price of 1.0351 and a bid (sell) price of 1.0350. You close the trade and again multiply the number of points it moved with your initial amount (£10 x 60), but because it moved against you, you lose £600.

When starting spread betting, it might be essential to keep up to date with all economic news and data because many factors can influence 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 spread betting 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 three ways you could do this. 

• The first one is to calculate how much money you are willing to risk on a single bet.
• The second one is placing strategic stop-loss orders. A stop-loss order could help you when the markets are exceptionally volatile and when it moves too quickly for you to take action. Stop-loss orders ensure you don’t lose more than you set out to lose.
• Lastly, you could use certain tools such as the VIX (volatility index), which allows you to gain insights into market sentiment and volatility.

You might need to become familiar with the type of market you decide to participate in. You can become knowledgeable by looking at economic data and events, analysing important economic announcements that are known to move the market, and reviewing charts.

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.

• Trading bull and bear markets, if you think the markets are going to rise, you could buy (go long), and if you think the markets will fall, you can sell (go short).
• You have various financial instruments to trade, such as indices, forex, commodities, and stock markets.
• The spread does not lead to any additional commission charges.
• The profits you could gain are tax-free for residents of the UK and Ireland. This means you don’t pay capital gains tax for profits you could make or stamp duty because you do not own the asset. Tax laws can change and might also depend on individual circumstances.
• You could use leverage to trade a larger asset with a small deposit.
• You could place spread bets with GBP on all the markets. You might not need different currencies to place bets.
• Negative balance protection protects retail traders from losses beyond their deposited funds.

Now that you’re equipped with everything you need to know, opening a spread betting account with Trade Nation is quick and simple.

• First, open your free spread betting account here.  
• To verify your account, you’ll need to submit a few documents for review.
• Once your account is approved, you can go ahead and fund it using your preferred method. We accept various popular payment methods, which you can view on your account.
• Now you’re all set to start spread betting through Trade Nation, regulated and authorised by the UK’s Financial Conduct Authority (FCA).

*This is not financial advice; this article is solely for educational purposes. Spread betting is only available to residents of the UK and Ireland.