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

• Spread betting allows traders to speculate on rising and falling markets for various financial instruments without owning the underlying asset. Stamp duty is not applicable to these trades.
• Spread betting uses leverage, allowing traders to participate in the market with larger positions, magnifying potential profits and losses.
• The spread in spread betting refers to the difference between the bid (sell) price and the ask (buy) price; this amount can vary depending on factors such as market conditions.
• The bet size is the amount of money you allocate towards a trade with a per-point movement in the market, which will help calculate the potential profits or losses.
• Bet durations are the time from opening and closing a position; you could close a position anytime during the instruments' trading hours.
• Risk management involves various factors, such as trading strategies, the level of risk a trader wants to take, and setting an appropriate stop-loss order to limit possible losses.
• Spread betting in the UK and Ireland is tax-free, meaning residents don't pay capital gains tax on potential profits.

Spread betting allows traders to speculate on the price movement of financial markets without owning the underlying asset. It’s not about predicting a win or loss - it’s about forecasting whether a market will rise or fall.

With Trade Nation, you can spread bet on a wide range of instruments from a variety of markets, including forex, indices, shares, and commodities. If you believe the price will go up, you could go long (buy). If you expect it to drop, you could go short (sell). Your profit or loss depends on how accurately you predict the direction and how far the market moves.

Unlike traditional investments, you only speculate if the price of a particular asset will go up or down instead of owning the actual asset. 

In the UK and Ireland, spread betting is also tax-efficient. Because you don’t take ownership of the asset, profits are exempt from capital gains tax and stamp duty - though tax rules can change and vary by individual circumstances.

Within spread betting, you’ll find you have two prices for an instrument: the bid price (at which you can buy) and the asking price (at which you can sell).

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 and losses can be magnified. 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.
• Then there's the maintenance margin, which is a top-up deposit to avoid a margin call should your initial deposit not be enough to cover potential losses.
• Lastly, there's a margin call. This is a notification you receive 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 essential.

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, in the image below, you’ll see that GBP/AUD has an ask (buy) price of 1.93778 and a bid (sell) price of 1.93762. If you deduct those two prices, you’ll get a spread of 0.00016 or 1.6 points/pips.

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.

Let's take a look at a real-world example. 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 prices of various instruments.

Having a good, solid risk management plan is essential, and it could help mitigate 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, which could be either a normal stop-loss order or a trailing stop order. A stop-loss order is placed at a predetermined level, which gets triggered if the market moves against your position and hits the order. This 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 familiarise yourself with the type of market you decide to participate in. You could examine economic data and events, analyse important economic announcements that are known to move the market, and review charts.

This is particularly helpful, as you could review recent and historical price movements.

Spread betting provides flexible access to global markets, with several features that appeal to both new and experienced traders. Its structure allows you to trade both rising and falling markets.

The main benefits include:

• Trade bull or bear markets: You can go long if you expect prices to rise, or short if you anticipate a decline - making it possible to profit in any market condition.
• Wide market access: Trade across major asset classes like forex, indices, commodities, and shares, all from a single platform.
• No commission charges: Costs are built into the spread, so you won’t pay additional commissions on trades.
• Leverage: Open larger positions with a smaller upfront deposit, increasing capital efficiency. Note that this also increases risk.
• GBP-denominated trading: Trade global markets in GBP without needing to convert currencies.
• Trade Nation’s negative balance protection: Retail traders are protected from losing more than they deposit, adding an extra layer of security.

Spread betting comes with notable risks and can expose traders to significant losses if not managed carefully.

Leverage, volatility, and market unpredictability all contribute to a high-risk environment. Some of the risks include:

• Leverage risk: You can control a large position with a small deposit, which magnifies both profits and losses. A minor market move against you can exceed your initial margin.
• Market volatility: Sudden price swings, economic data, or breaking news can cause rapid and unpredictable losses, especially in fast-moving markets.
• Slippage and gapping: Your trade may execute at a different price than intended, or skip your stop entirely if the market gaps, leading to larger-than-expected losses.
• Automated close-outs: If your account equity drops too low, positions may be closed automatically to prevent further losses - often at unfavourable prices.
• Overtrading temptation: 24/5 access can lead to excessive trading, increasing exposure and reducing discipline.
• Holding costs: Overnight positions may incur financing charges that erode profits or deepen losses.
• Complexity for beginners: Spread betting involves advanced concepts like margin, bid/ask spreads, and position sizing, which may be difficult to grasp without experience.

Effective risk management is essential to trading responsibly and protecting your capital.

While spread betting and contracts for difference (CFDs) both allow you to speculate on price movements without owning the underlying asset, there are key structural and practical differences traders should understand.

Spread betting is traded over the counter (OTC) through a broker, whereas CFDs can offer direct market access (DMA), depending on the provider. DMA typically allows for faster execution and potentially lower transaction costs - an important consideration for active traders.

Another key distinction lies in position sizing. With spread betting, you stake a specific amount per point of price movement in GBP, offering flexibility in how much you risk. In contrast, CFDs use standardised contract sizes, with each lot carrying a fixed value. This structure makes CFD sizing less customisable but more consistent across markets.

Both spread betting and CFDs have no expiry; however, it might be essential to remember that holding positions overnight typically incurs swap or financing charges, which can impact long-term profitability.

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 deposit funds 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.