What is spread betting?
Spread betting is a tax-free derivative product, which enables traders and investors to benefit from price fluctuations of underlying financial assets, including stocks, commodities, indices, currency pairs and cryptocurrencies.
A flexible form of trading, spread betting allows traders to speculate on bullish and bearish price movements, taking long and short positions accordingly. It provides traders with double the amount of trading opportunities than the more traditional form of buy-and-hold trading.
Spread betting explained simply: key features
- Flexibility: long and short positions available
- Spread betting leverage
- Spread betting margin
What does it mean to go short or long in spread betting?
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.
Learn spread betting: leverage
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.
Learn spread betting: margin
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.
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 itself, 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, which is known as the stake.
To better understand how spread betting works, let’s take a close look at three major components: the spread, the bet size and the bet duration.
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.
The 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 certain minimum we accept for a particular market.
You can calculate your profit or loss by taking the difference between the opening and the 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 a one pence when it comes to UK shares, or a one point move on an index such as the Dow Jones or FTSE 100.
The bet duration
In contrast to contracts for difference, 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 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.
Spread betting example: Tesla
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 when the price reaches 57122. In this case the market gains 50 points (57122 – 57072) and you will get a tax-free profit of £1000 (50 x £20) .
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).
To learn more on how to spread bet, follow our ultimate spread betting guide.
*Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.