Available only in the UK and Ireland, spread betting is a type of financial derivative, meaning traders can profit by speculating on market movements without actually owning the underlying asset. Because a trader will spend a certain percentage of their capital, there are risks involved, so it’s important to understand the pros and cons of spread betting before you start.
Spread Betting Basics
Spread Betting is about choosing a stock to “trade” and deciding how much you want to spend on a potential upside or downside. This amount will be determined by price action, and if the asset performs as expected, the ticket will be successful. However, if this is not the case and the price moves in the opposite direction, you will lose money. The good news is that there are ways to reduce the risk factor, usually by placing a stop loss order, which automatically closes the trade if things don’t go well. One of the main advantages of spread betting is that you can sell short (prices go down) or buy long (prices go up), so there is double the chance. If you still want to learn more about spread betting, you can read more here.
Quick Overview of Margin and Principal Amount
Because spread betting uses leverage, you only have to put a small amount of your money into the trade, this is called the margin (it’s usually just a small part of the total value of the assumed position). The amount deposited can be important because its price indicates the amount of the underlying asset you want to trade and will affect the margin. Profits and losses are calculated by multiplying the bet amount for each movement signal. Here is a basic example:
If you open a position in the FTSE 100 at £1 per point, with a price set at 5000, your margin deposit will be £250 (5%). This means you have a total underlying exposure of £5,000 at this price.
- Two examples of spread betting
- Examples of short selling:
In short selling, the purpose is to trade (and profit from) a decrease in the price of a security. In this case, the example is based on the GBP/USD currency pair.
At the start of the trade, your quotes are between 1.23000 and 1.23008, so 1 pound sterling is roughly equal to $1.23 on the main forex market.
The change from 1.23000 to 1.23010 is classified as a 1 pip move as the transaction is 0.0001 per tick.
looks attractive so you’ll want to sell it for £5/instruction. The face value of the exchange is £61,500 (12,300 points x £5). has a margin requirement of 3.33% and a leverage ratio of 30:1, so £20
8 is the margin you need to deposit the bond.
If the price drops to 1.22500, now is the time to place a limit order to buy. This means that when the spread offered by your broker falls to 1.22
92-1.22500, the order will be executed and you will make a profit of £250 on the completed trade.
When selling short, it is bad if the price of the underlying security goes up. If the given spread reaches 1.23
92-1.23500, the loss will be 50 pips x your £5 bet, which equals £250. Buy
Example :
Finds a value with a buy price of 11550 (£115.50) and an offer price of 11560 (£115.60). You believe that the asset’s stock will rise in the coming days. This encourages you to buy (go long) at £10 per point.
Your prediction turns out to be correct and you choose to close your position when the market rises 30 pips and the sell price reaches 11590. This means your profit is £300 (30 x £10).
If your guess is wrong and the price drops to 11510, you lose £500 (50 x £10) because the market is 50 pips from your bet.
Should you start spread betting?
Now that you understand what spread betting is and have some examples, you can decide to get involved. If this is the case, make sure you choose a reputable broker, practice risk management and never trade more than you can handle. Since these types of trades are leveraged trades, you risk losing more than your initial deposit as the gains and losses are equal through the distribution of pips. With that in mind, it can be helpful to keep a close eye on how things are going so you don’t take a bigger loss than you expected. Use a demo account and stop losses to protect yourself from this situation.
Disclaimer:
Spread Betting and CFDs are complex instruments and have a high risk of losing money quickly due to leverage. The vast majority of retail client accounts lose money when trading spreads and/or CFDs. You need to ask yourself if you understand how spread betting and CFDs work, and if you can afford to take the high risk of losing your money.
CFD and spread trading is not available to US citizens as it is prohibited by US law.
The tax treatment depends on your situation. Tax laws may change or differ in jurisdictions outside the UK.
