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Your complete guide to spread betting 2021

Spread betting is a tax-free derivative product available to traders in the UK and Ireland. When making a spread bet you don’t buy or sell any asset physically, you merely speculate on the price direction of the underlying asset. Spread betting is a leveraged product, meaning your profit (and loss) can be magnified.

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What is spread betting?

Spread betting is a tax-free derivative product that enables traders and investors to benefit from price fluctuations of underlying financial assets, including stocks, commodities, indices and currency pairs. 

A flexible form of trading, spread betting allows traders to speculate on bullish and bearish price movements (when the market goes up or goes down), taking long and short positions. It provides traders with double the amount of trading opportunities than the more traditional form of buy-and-hold.

In this guide:

Capital.com has an AI-powered news feed full of analytical articles and info-rich videos, earnings reports and IPO announcements; and an economic calendar with a full schedule of global economic events that could move markets and may help you find your next trade.

Graph showing how spread betting works holding long and short positions

 

Learn how to spread bet

How does spread betting work? When making your bet, you open a position based on the assumption of the asset’s price future movement: whether it will rise or fall. You do not buy or sell the asset, like a commodity or a share, instead you make a bet on how the market will move. When trading this way you buy or sell a specified amount per point of the asset's movement – such as £10 per point. This is known as the stake.

As with CFD trading, when you spread bet, you decide whether the price of an asset is likely to go up or down and take a long or a short position accordingly. Spread betting is flexible as you can potentially profit from rising or falling markets.

Step 1: open a spread betting account

Using Capital.com’s app UK residents can set up a spread betting account. This is separate from your CFD trading account and your stock broking account, if you already have both of those.

If your spread betting account is your first account with us, you will need to verify your identity and make an initial deposit with a credit/debit card or via bank transfer or other available money transfer service.

App screen

You need a separate spread betting account because spread betting is treated differently to CFD trading and stock broking. This in terms of how it is regulated, how much leverage is available and how any profits are taxed.

The Capital.com spread betting app gives you access to more than 3,000 popular markets, including forex, stocks, indices and commodities.

Step 2: develop your spread-betting strategy

Getting deeper into trading you’ll encounter various spread-betting strategies. Although you may find them effective, only practice will show what works best for you. Building a trading plan, you will have to develop your own approach, considering the following parameters:

spread betting strategy chart showing factors to consider, including risk tolerance, time, funds, trading goals and markets

Factors to consider:

  • Your risk tolerance - the more volatile the asset the more you stand to lose

  • Your time available to watch markets - prices can move suddenly and you may be caught out if you are not watching closely

  • Available funds - trading on margin can increase both profits and losses, so only trade with the cash you have available

  • Trading goals - decide how much profit you want to make and stick to your target

  • Preferred markets to trade - use expertise if you know about a specific market or category

One of the benefits of making your own trading strategy is that it enables you to eliminate emotional trades and add a clear structure to your decision-making process.

Step 3: Use Capital.com’s features to choose the assets to trade

The Capital.com spread betting app gives you access to more than 3,000 popular markets, including forex, stocks, indices and commodities.

Access 3000 marketsAccess 3000 markets

There is an AI-powered news feed full of analytical articles and info-rich videos, earnings reports and IPO announcements; and an economic calendar with a full schedule of global economic events that could move markets and may help you find your next trade.

Advanced charts, drawing tools and 75 technical indicators will enable you to conduct a thorough technical analysis of the selected market and spot the best levels to enter and exit trades.

Effective risk management tools, including instant price alerts, stop-loss and take-profit orders, and negative balance protection will help you to protect your capital and minimise risks.

Step 4: open a spread bet

How to spread bet: five steps

Once you have chosen the market you would like to trade today, you will have to decide which direction to choose. Whether you believe the price will go up and open a long position (Buy), or you think the price will go down and take a short position (Sell).

To open a spread bet you also need to define the size of your position. In spread betting, the amount you want to bet per point of the asset’s price movement is your stake.

Please, never forget to evaluate your risk appetite before entering the market. Many traders feel it is important to place stop-loss and take-profit orders to reduce the risks associated with derivatives trading.

When you feel ready, open a short or a long position on the chosen market. Track the performance of your trade to close it in profit, or with a minimum loss if the market turns against you.

 

Spread betting examples

How to spread bet in practice: let’s take a closer look at spread betting trading through several examples with different outcomes for traders.

Spread betting example 1: trading Tesla (TSLA)

Let’s assume that Tesla (TSLA) shares are traded at a sell price of 57014 ($570.14) and a buy price of 57072 ($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 per point of movement at 57072.

If your prediction is right and the Tesla stock goes up, you may decide to close your trade (Sell) when the price reaches 57122. In this case the market gains 50 points (57122 – 57072) and you will get a tax-free profit of £1,000 (50 x £20). 

Spread betting example: trading Tesla with profit

Still, trading is risky and the market can move against you. If the TSLA price goes down to a Sell price of 57052, you will bear a loss. The share price fell by 20 points (57072 – 57052), meaning your trade will end up with a loss of £400 (20 x £20).

Spread betting example: trading Tesla with loss

Spread betting example 2:  buying Sainsbury’s (SBRY) shares

In our second more detailed example, 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 in £x per penny price movement.

For example, if the SBRY price moves up or down by 50 pence (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. 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 was correct and the Sainsbury’s shares jump sharply in value in the next couple of days to 253.5/254.3, you decide to exit your Buy bet by selling at 253.5, which is the new Sell price.

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).

How to spread bet - profitable-example

Result B: losing a spread bet

Unfortunately, in spread betting, like in any other type of trading, you can’t always be right. Losses are an inevitable part of trading and your goal is to minimise the risks by developing an effective spread-betting risk management strategy.

Looking back at our example, let’s assume your Buy spread bet was incorrect. Instead of rallying further, Sainsbury’s stock went down by 50 points to 153.5/154.3. To exit your trade you decide to close it by exiting 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).

How to spread bet - losing-example

Spread betting example 3: shorting the FTSE (UK 100) index

If you want to spread bet on indices, you could choose the FTSE 100. Let’s assume it is trading at 5653/5654. You believe the index price will go down and decide to open a Sell position on the UK 100 at £5 per point.

The margin for UK 100 (FTSE) trading is 5%, which means you would deposit £1,413.25 (£5 x 5653 x 5%) to open a trade.

Result A: a profitable bet

If your forecast is right and the price falls down to 5602/5603, you may decide to close your Sell bet by buying at 5603.

In this case the price moved 50 points (5653-5603) in your favour. To calculate your profit you should multiply your stake by the number of points. The profit from this trade will be £250 (£5 x 50).

Result B: a losing bet

If your prognosis is wrong and the price of the FTSE 100 goes up, you will make a loss. Let’s assume the price reaches 5702/5703 and you feel that the price will continue to rise. To limit your loss, you decide to close the trade by buying at 5703, which is the new Buy price.

In this case the price moves 50 points (5703-5653) against you, which means a loss of £250 (£5 x 50).

 

Stop-loss in spread betting

Once you have opened a spread bet, you can watch its performance and the possible profit or loss in real time. You can exit the trade any time the market is open. When you tap the “close” button your order is executed and your profit or loss is reflected on your account balance. 

However, never forget about the stop-loss. The stop-loss order is the number-one risk management tool to prevent the market from moving against you too far. Many traders view it as absolutely essential, as markets can move very sharply.

How to place a stop-loss 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.

In combination with a stop-loss order, take-profit orders are often used to prevent you from missing out gains. You set the price at which you would be happy to take your profit. If the asset’s price rises or falls to the take-profit point, the take-profit 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. You have not missed out.

If you can’t constantly follow markets, the stop-loss and take-profit orders can give you some freedom and confidence to manage your profits and losses. 

 

Key features of spread betting

To better understand how spread betting works, let’s take a close look at six major components:

  • Flexibility: long and short positions available

  • Spread-betting leverage

  • Spread-betting margin

  • Spread

  • Bet size

  • Bet duration

 

Going long vs going short

What does it mean to go long or short? In spread betting you can profit from both ascending and descending price swings of the underlying assets, making long and short trades accordingly. If you feel the price of the underlying asset is going to rise – you “go long” and open a position to Buy. If you feel the price of the underlying asset is going to move down –  you “go short”, opening a position to Sell. 

The amount of profit or loss of your trade depends on the extent to which your forecast was accurate and the size of your opening position. For example, if you open a short position and the underlying market does decline, your spread bet will profit. Otherwise, if the market goes against you, you will lose. If you open a long position and the market rises, moving in your favour, you will profit. If the market declines, your trade will lose.

Graph explaining how to go long or go short in spread betting

 

Leverage in spread betting

Leverage is one of the main features that makes spread betting so popular among traders. It provides the possibility to open a much bigger trade with just a fraction of the underlying asset's value. In contrast with traditional share trading, where you have to pay the full value of your investment upfront, spread betting enables you to deposit only a portion of that overall value and the rest is provided as leverage by your broker.

Leveraged trading can significantly increase your profits and losses, as they are calculated based on the total value of the trade, not the initial sum of your deposit. Of course, if profits are magnified using leverage then it is important to understand that losses are also magnified. This is why it is important to develop an effective risk management strategy to minimise losses when markets do not move as you expected

Leverage 1:20Leverage 1:20

 

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”. 

In spread betting there are two margin types to remember: the initial (deposit) margin and the maintenance margin. The initial margin is the deposit you make when opening the trade. It will be enough to start trading and hold an amount in reserve to deal with losses and price swings.

Maintenance margin may be required if the trade is going against you. It is meant to be enough to cover potential additional losses not covered by the initial margin. If you do not have enough money in your account to cover any running losses you will receive a notification from your broker – a margin call.

Pie chart showing 20% margin in spread betting

 

What is the spread?

The spread is the cost you pay to open a trade. It is the difference between the Sell and Buy prices. All markets usually have bid (Sell) and ask (Buy) prices, meaning that you will buy a bit higher than the middle price of the underlying asset and sell slightly lower than the middle price of the asset. 

For example, the FTSE 100 index is trading at 5657.5 with a 1 point spread.  It would make the ask price equal to 5658 and the bid price equal to 5657.

Spread explained as the difference between the bid and ask price

 

Bet size

The size of your bet is the amount of money you want to bet per point of the underlying market’s price movement. You define the size of your bet at your own discretion, subject to the minimum we accept for a particular market. 

You can calculate your profit or loss by taking the difference between the opening and closing price of your trade, multiplied by your bet size. The asset's price movement is calculated in points. One point of movement may represent, for example, one pence when it comes to UK shares, or a one point move on an index such as the Dow Jones or FTSE 100.  

For example, if you open a bet for £5 per point on the FTSE 100 index and it goes 50 points in your favour, your profit will comprise £5 x 50 = £250. 

 

Bet duration

In contrast to contracts for difference (CFDs), all spread bets have a predefined expiry, ranging from one day to a couple of months. Still, you can close your bet at any point before the expiry date.

You can run the daily spread bets as long as you want. Usually they have the tightest available spreads. For each day your bet remains open, your account balance will be adjusted to reflect the funding cost incurred due to trading on leverage. Daily bets are usually used to trade on shorter-term market movements.

Quarterly bets expire at the end of the specified quarter period. The funding costs for these bets are in-built into the spread. Quarterly bets can also be rolled over to a new quarter if you require and want to continue to run the position. 

 

Advantages of spread-betting

chart showing seven benefits of spread betting

Tax-free profits

One of the most significant spread-betting advantages is that profits from spread betting are exempt from capital gains tax (CGT), although tax law is subject to change. In other forms of trading, like share trading, the profits earned are usually subject to capital gains tax, which can reduce profits.

No stamp duty

Another key point in the list of spread-betting benefits is the absence of stamp duty. It means that traders don’t have to pay stamp duty when spread betting, because you don’t actually buy the underlying asset itself. It helps to reduce the cost of spread bets, often making them a more cost effective solution when compared with other forms of trading.

Long and short trading

Spread betting is a flexible form of trading, meaning you can trade on both rising and falling markets. If you think the price of the underlying asset is going to rise, you can go long – open a Buy position. If you think the price of the underlying asset is going to fall, you go short – open a Sell position. 

Spread betting using leverage

Spread betting is a leveraged form of trading, meaning you can start trading with a smaller initial deposit. When trading on margin, investors only have to tie up a particular percentage of their funds to open a trade. The rest of the money to fund the full value of the position is provided by the broker. 

For example, if the margin rate for a particular asset is 10% and you place a bet with a value of  £500, you would only tie up £50 from your account balance to open this trade. Remember that leverage can magnify your losses, as well as profits. It is important to use risk management tools, such as stop-loss and take-profit orders and to bet only what you can afford to lose.

Trade UK 100 - UK100 CFD

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Access to thousands of spread-betting assets

Spread betting brings a cost-effective way to speculate on a wide range of markets, including stocks, indices, commodities and forex pairs. Capital.com offers an opportunity to trade in thousands of the world’s most popular assets, from a single trading account.

Commission-free trading

Spread betting does not incur any additional commission for executing your trades. The cost of opening your position is covered in the spread. This is the difference between the Buy and Sell price you see on the spread-betting platform. With Capital.com we are committed to providing you with competitive spreads and keep them among the tightest in the industry. 

Execute spread-betting trades with Capital.com

Capital.com has developed a user-friendly AI-powered trading app to give you the ultimate spread-betting experience. It is equipped with advanced interactive charts and drawing tools, more than 75 technical indicators and a personalised news feed, which gives the latest stock market updates; analytical insights and info-reach videos to help you find your next bet.

Ready to spread bet with Capital.com? Download the app and start trading.

*Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.

FAQ

Spread betting can be useful for anyone who wants to find a cost-effective type of trading and appreciates the opportunity to trade on various financial markets from a single app.

Spread betting suits both professionals and newcomers, provided that new spread betters are ready to learn the details of this way of trading. 

Spread betting is available for residents of the United Kingdom and Ireland and is regulated by the Financial Conduct Authority.

Spread betting is considered a cost-effective solution, because it is exempt from capital gains tax and stamp duty. There are no additional commissions, when compared to other types of trading. As a broker, we are remunerated through the spread – the difference between the Buy and the Sell price – for each asset.  When you are spread betting, this spread is your cost as a client. 

Before placing a trade you should consider your risk management strategy and define how much capital you can afford to risk.

When making a spread bet you speculate on whether the market price will go up or down. If your forecast is right, your trade will profit.

Still, it is important to remember that all types of trading carry risk. Never forget about risk management tools and do not risk more than you can afford to lose. 

Why spread bet with Capital.com?

graphic showing the advantages of spread betting with Capital.com

Try spread betting to speculate on upward and downward market moves. Appreciate the opportunity to go long or short on a wide range of markets with leverage and tight spreads.  Start with a small initial deposit of £20 (€20, $20) and spread bet with no commission, just the dealing spreads. 

Our smart bias detection system will help to boost your trading performance and deliver personalised trading insights.

FCA-regulated spread betting provider Capital.com ensures your funds are fully protected and deposited securely in segregated bank accounts.

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