How Spread Betting Works

Spread betting gives you the opportunity to speculate on movements in the financial markets without having to purchase the underlying asset. For each point change that the market rises or falls in your chosen direction, you can profit, or incur losses.

What is spread?

When you trade any financial instrument, a provider will offer a buy price and a sell price either side of the underlying market price. The buy price minus the sell price is called the spread.

The underlying market value for the UK100, for example, is priced at 6677 points. The buy price is currently trading at 6678 points and the sell price at 6676 points. The spread is simply the difference between these two prices (6678 – 6676 = 2).

Spread is also the amount you are charged to open and close every trade you make. A tighter spread means lower trading costs.

How does spread betting work?

A spread bet is you predicting the direction a market will move in. When you speculate a market will rise and go long, you will profit with each point increase above the buy price. If you predict the market will fall and go short, you will start to profit for each point by which the market drops below the sell price.

In the UK100 example, you predict that the share price will increase so decide to go long (buy) with a stake of £50. As speculated, the UK100 climbs 5 points to a buy price of 6683 and a sell price of 6681. Now you decide to take the profit and close your trade. You bought at 6678 points and are now selling at 6681, making the difference between your opening and closing position 3 points. Your £50 stake multiplied by 3 generates a profit of £150.

If markets move adversely to your position, you will incur losses for each point change in that direction.

What makes spread betting different from traditional trading?

Leveraged: Spread betting is a leveraged product. When you place a spread bet, you don’t have to cover the total notional value of your bet, you deposit a margin of this instead. The margin requirement is usually set at around 1% and 4%. This significantly increases the potential for profits, or losses.

Short Selling: Unlike when you own the underlying asset, you can profit from shares falling when you go short.

Tax-free: You do not pay UK Capital Gains Tax on profits made from financial spread betting. Unlike shares or CFDs, spread betting is also free from UK Stamp Duty.

Mathew Thacker is a writer for Core Spreads
www.corespreads.com
Risk Warning: Financial spread bets are leveraged products, which means you could lose more than your deposits. If you’re hazy on what that means, you shouldn’t trade.

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