Spread betting is a form of derivative trading available in the UK and Ireland. It is inherently speculative, which means with great profits come great risks. So, what is spread betting and how do spread bets work? In this guide, we’ll help you understand.
In this spread betting guide
- What is spread betting?
- Spread betting explained
- Spread betting examples
- Spread betting risk management
- Spread betting vs CFDs
- Spread betting vs share trading
- Types of spread betting strategies
- Pros and cons of spread betting
- Why spread betting with Capital.com?
What is spread betting?
Spread betting is a tax-free* financial derivative product that enables traders and investors to speculate on the price fluctuations of underlying financial assets, including stocks, commodities, indices and foreign exchange (forex). A flexible form of trading, spread betting offers traders exposure to bullish and bearish price movements, taking long and short positions.
The examples above are for educational purposes only.
Spread betting explained
So how does spread betting work? There are a number of key features traders should be aware of before opening their first position, such as knowing the difference between going long and short, and understanding leverage and trading on margin.
Going long vs going short
In spread betting you can speculate on both ascending and descending price swings of the underlying assets, making long and short trades accordingly.
If you think that the price of the underlying asset is going to rise, you ‘go long’, opening a ‘buy’ position. If you expect the price to fall, you ‘go short’, opening a ‘sell’ position.
The amount of profit or loss of your trade depends on the accuracy of your forecast and the size of your position.
For example, if you open a short position and the underlying market declines, your spread bet will be in profit. If the market goes against you (the price rises), you will lose. On the other hand, if you go long and the market rises, moving in your favour, you will profit. If the market falls, your trade will show a loss.
The examples above are for educational purposes only
Leverage in spread betting
Leverage is a key feature of spread betting. It allows traders to open a larger position with just a fraction of the underlying asset's value. In contrast to traditional share trading, where you have to pay the full value of upfront, spread betting enables you to deposit only a portion of that overall position’s value. The rest is lent by your broker.
Leveraged trading can magnify both your profits and losses, as they are calculated based on the total value of your trade, not the initial sum of your deposit.
Leverage 1:20The examples above are for educational purposes only
Margin in spread betting
When making a spread bet, you tie up an initial amount – the initial margin requirement – which accounts for a certain percentage of the total trade’s value. That is why spread betting is often referred to as trading on margin.
The two key margins to remember are the initial (deposit) margin and the maintenance margin.
The initial margin requires you to deposit equity into your account when you open a trade. It will be enough to start trading and hold an amount in reserve to cover for potential losses and price volatility.
Maintenance margin may require you to fund your account if a trade goes against you. It is meant to cover for additional losses not covered by the initial margin. You receive a margin call if there’s not enough money in your account to cover the maintenance margin.
The examples above are for educational purposes only
What is a spread?
A spread is the difference between the sell and buy prices. All markets usually have bid (sell) and ask (buy) prices. The meaning is that you buy higher and sell lower than the mid-price.
Bet size
The size of your bet is the amount of money you want to stake for each point the price of the underlying asset moves. You define the size of your bet at your own discretion, subject to the minimum required for a particular market.
You can calculate your profit or loss by calculating the difference between the opening and closing prices of your trade and multiplying it by your stake. The asset's price movement is calculated in points. One point may represent, for example, one pence for UK shares, or a point move on an index such as the Dow Jones (US30).
For example, if you open a bet for £5 a point on the FTSE 100 index and it goes 50 points in your favour, your profit will be £5 x 50 = £250.
Bet duration
Unlike contracts for difference (CFDs), spread bets have expiry dates. With Capital.com, you can run spread bets for as long as you want and close them at any point before the expiry date.
Spread betting examples
Let’s take a closer look at spread betting through several examples with different outcomes. Note that all examples listed below are for educational use only. They do not reflect current market prices.
Spread betting example 1: trading Tesla (TSLA)
Let’s assume that Tesla (TSLA) shares are traded at a sell price of 57,014 ($570.14) and a buy price of 57,072 ($570.72). You expect the TSLA price to go up in the next couple of days. You take up a long position (buy) Tesla shares for £20 a point of movement.
Result A: A profitable bet
If your prediction is right and Tesla stock goes up, you may decide to close your trade (sell) when the price reaches 57,122. In this case, the market will have gained 50 points (57,122 – 57,072), giving you a tax-free* profit of £1,000 (50 x £20).
Result B: Losing a spread bet
The examples above are for educational purposes only
All trading contains risk. The market can move against you. If the TSLA price goes down to 57,052, you will incur a loss. If the share price fell by 20 points (57,072 – 57,052), your trade would end up with a loss of £400 (20 x £20).
The examples above are for educational purposes only
Spread betting example 2: Buying Sainsbury’s (SBRY) shares
In our second more detailed example, let’s assume that Sainsbury's stock (SBRY) is trading at 202.7/203.5, where 202.7 is the sell price and 203.5 is the buy price. The spread in this example is 0.8.
Spread betting trades on the Sainsbury’s stock are executed per penny price movement. For example, if the SBRY price moves up or down by 50p (50 points) you would make or lose 50x your stake, depending on whether you had sold or bought to open the position.
Let’s say you believe that the Sainsbury’s stock’s price will appreciate and decide to open a buy position – going long at £10 per point. For the purpose of this example, let’s assume that the margin rate for Sainsbury is 20%. This means you will deposit only 20% of the full trade’s value. In this example the total position is £10 x 203.5, which gives an overall exposure to Sainsbury's of £2,035.50. Position margin will be 20% of this amount, which means that £407.10 will be allocated from your account against this trade.
Result A: A profitable bet
Assuming your prediction is correct and Sainsbury’s shares rise to 253.5/254.3, you can exit your buy bet by selling at 253.5.
In this case, the price has moved in your favour by 50 points (253.5 – 203.5), which means your profit will be £500 (50 x £10).
The examples above are for educational purposes only
Result B: Losing a spread bet
As losses are part of trading, let’s assume your buy spread bet was incorrect. Instead of rallying further, Sainsbury’s stock fell 50 points to 153.5/154.3. To exit your trade you close at the sell price of 153.5.
The market moved against you by 50 points (203.5 - 153.5). In this case you will bear a loss of £500 (50 x £10).
The examples above are for educational purposes only
Spread betting example 3: Shorting FTSE (UK 100)
Let’s assume the FTSE100 (UK100) Index is trading at 5,653/5,654. You believe the index price will go down and decide to open a sell position on the UK 100 at £5 a point.
The margin for UK 100 (FTSE) trading is 5%, which means you would deposit £1,413.25 (£5 x 5,653 x 5%) to open a trade.
Result A: A profitable bet
If your forecast is right and the price falls to 5,602/5,603, you may decide to close your bet by buying at 5,603.
In this case the price moved 50 points (5,653-5,603) in your favour. To calculate your profit you should multiply your stake by the number of points. The profit from this trade would be £250 (£5 x 50).
Result B: A losing bet
If your bet is wrong and the FTSE 100 rises, you will make a loss. Let’s assume the price reaches 5,702/5,703 and you feel that the price will continue to rise. To limit your loss, you decide to close the trade by buying at 5,703.
In this case, the price moves 50 points (5,703-5,653) against you, which means a loss of £250 (£5 x 50).
UK100 Index Live Chart
Source: Capital.com.
Past performance is not a reliable indicator of future results.
Spread betting risk management
All trading contains risk. Spread-betting is high risk due to the use of leverage. Traders should develop an efficient risk-management strategy before opening a position. Stop-loss and take-profit orders are some of the tools used by traders for their risk management.
Stop-losses in spread betting
A stop-loss order is an instruction to your broker to buy or sell an asset when it reaches a certain price. You set a stop level below your entry price if you go long on an asset, or above your entry price if you go short.
Note, however, that in case of volatile markets, lack of liquidity or big orders sizes can result in slippage. A guaranteed stop loss can protect against slippage. It comes at a fee.
The examples above are for educational purposes only
Take profit orders in spread betting
Take-profit orders, on the other hand, allow you to set the price at which you would be happy to book your profit if the trade goes in your favour.
If the asset’s price rises or falls to the take-profit level, the order is executed and the trade is closed with your target gain. This means you take your profit even if the asset only briefly reaches your target point before reversing.
Spread betting vs CFDs
CFDs and spread bets are both popular derivative instruments for trading on margin. But, while the two appear similar, there are key differences between trading via spread betting and CFDs.
Spread betting | CFD trading | |
Uses leverage | Yes | Yes |
Ownership of the underlying asset | No | No |
Allow going both long and short | Yes | Yes |
Require to fund the initial margin | Yes | Yes |
Has expiration date | Yes | No |
May require transaction commission fees | No | Yes |
Free of capital gains tax* | Yes | No |
Profit or loss calculation | Amount of money per point of price movement | Difference in price between the contract opening and closing price |
Countries available | UK and Ireland only | Globally |
Traded on | Spread betting account via broker | CFD account via broker |
Spread betting vs share trading
Share trading involves buying and selling company stocks with the expectation of the price to rise. It’s principally different from stocks spread betting, even though both involve price speculation.
Spread betting | Share trading | |
Use leverage | Yes | No |
Ownership of the underlying asset | No | Yes |
Allows to go both long and short | Yes | Long only |
Has expiration date | Yes | No |
May require transaction commission fees | No | Yes |
Free of capital gains tax* | Yes | No |
Profit and loss calculation | Amount of money per point of price movement | Difference in price between buying and selling |
Countries available | UK and Ireland only | Globally |
Traded on | Spread betting account via broker | Stock-trading account, stock exchange |
Types of spread betting strategies
There are various trading strategies available for spread-betters, depending on their timeframe, preferred approach, asset class and beliefs about the markets.
The following list is a short overview of some key strategies. We encourage you to conduct thorough research before choosing the most suitable approach to your trading.
News-based spread bets
This strategy is based on responding to asset-related news, such as economic readings, company reports and financial results and central bank decisions. To master this approach, traders should monitor market news closely.
Unexpected events could generate bigger price swings. As the saying goes: “Buy the rumour, sell the news.” For example, when a company reports upbeat earnings that have been widely anticipated by analysts, the news could have been priced in already.
Trend-based spread bets
Is the trend really your friend? According to the trend following strategy, it could be.
Markets tend to move in trends. For example, during a bull market, prices of growth stocks and other risk-on assets can tend to rise. Meanwhile, during times of turbulence, safe-haven assets may gain momentum.
Trend traders use technical analysis tools to identify trend waves and ride them by spread betting in the same direction.
Arbitrage spread betting
Arbitrage in spread bets refers to the gap in the price of the same security listed by two or more spread betting brokers.
There may also be cross-instrumental arbitrage, for example, between the pricing of a stock spread bet against the price of the underlying share or against a futures or an options contract on the same security.
A way of explaining spread betting strategy is to consider an example. Let’s assume an online retailer offers a kilogram of apples for £3. At your local market you can sell the same kilo of apples for £5. An arbitrage trader would buy apples online and resell them in the market, booking a £2 profit on each kg.
Pros and cons of spread betting
As with any form of trading, spread betting has its pros and cons, benefits and disadvantages. It’s important to learn about these aspects of spread betting before deciding whether it’s appropriate for you.
Advantages
Free of capital gains tax* in the UK.
Allows to go both long and short, speculating on both rising and falling prices.
Allows the use of leverage and trading on margin, where traders can open larger positions with less capital. Note, however, that leverage magnifies both profits and losses.
Free of transaction commission fees.
Disadvantages
Only available in the UK and Ireland.
Leverage magnifies losses. Spread betting is high-risk.
No access to dividends or other shareholders rights when spread-betting stocks.
Why spread betting with Capital.com?
Advanced AI technology at its core: A personalised news feed provides users with unique content depending on their preferences. The neural network analyses in-app behaviour and suggests videos and articles that fit your trading strategy.
Trading on margin: Thanks to margin trading, Capital.com provides you with the opportunity to spread bet stocks and other top-traded commodities, even with a limited amount of funds in your account. Keep in mind that spread bets are leveraged products, which means both profits and losses can be magnified.
Trading the difference: When spread-betting, you don’t buy the underlying asset itself. You only speculate on the rise or fall of its price. A trader can go short or long, and apply trading scenarios that align with their objectives. Spread betting is similar to traditional trading in terms of its associated strategies. However, spread beats are short-term in nature, due to overnight charges.
All-round trading analysis: The browser-based platform allows traders to shape their own market analysis and make forecasts with sleek technical indicators. Capital.com provides live market updates and various chart formats, available on desktop, iOS and Android.
Sign up at Capital.com and use our web platform or download the trading app to spread-bet on the go. It will take you just a few minutes to get started and access hundreds of markets.
*Note that tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.