What is Spread Betting 

Spread betting is a form of speculation on the price movements of financial assets, without actually owning those assets. The broker sets a “price spread” consisting of two prices: the bid price (for buying) and the ask price (for selling). The investor bets on whether the asset’s true price will rise above the ask price or fall below the bid price. 

The core idea: You’re speculating on the direction of the price, not on the ownership of the asset. 

Important Distinction:  

Spread betting differs from spread trading, which involves opening offsetting positions in two or more financial assets to profit from changes in the spread between their prices. Offsetting positions mean opening a trade opposite to an existing one, aiming to hedge and try to reduce the overall risk of your trade by balancing one trade with another. 

How Spread Betting Works 

Here are the key concepts when opening and closing a bet: 

When initiating a spread bet, you’ll always see two prices: the Bid price and the Ask price. 

But what’s the difference between buying and selling in spread betting? 

• Buying (Long): This is a bet on the market value increasing. 

• Selling (Short): This is a bet on the market value decreasing. 

This allows you to profit from both market directions, up and down. Simply choose to “buy the market” if you expect the price to rise, or “sell the market” if you expect the price to fall. 

Example:  

Did you anticipate a drop in gold prices? You can open a “sell” bet to profit from this decline. Your profit or loss here depends on the accuracy of your prediction: if the price falls, you profit. If it rises, you lose. 

To close a bet:  

You simply take the opposite direction of your initial trade. If you started with a “buy,” you close the trade with a “sell,” and vice versa. 

What is “Bet Size” in Spread Betting? 

In spread betting, your “bet size” is the amount you allocate per unit of movement in the underlying asset’s price (called a “point”). You can determine this amount, as long as it’s not below the minimum set for the market. 

Calculating Profit or Loss:  

Your profit or loss is determined by multiplying the difference between your opening and closing prices (the number of points the price moved in your favor or against you) by your bet size per point. 

What are these points?  

A “point” is a unit of measurement for market price change. Its monetary value (e.g., a pound sterling, a pence, or a fraction of a pence) varies based on the liquidity and volatility of the market you’re trading. You’ll find the point value for your chosen market in your “deal ticket.” 

Example:  

Suppose you opened a bet of £2 per point on the FTSE 100 index: 

If the index rose 60 points (in your favor), your profit is £120 (2×60). 

If the index fell 60 points (against you), your loss is £120. 

The Spread: The Hidden Cost of Trading 

The spread is simply the difference between the buy and sell prices of any financial asset in the market. These two prices are also known as the Ask price and the Bid price. 

How it Works:  

This spread represents the primary trading cost. Therefore, when you open a trade, you’ll always pay a slightly higher price than the market price when buying, and you’ll receive a slightly lower price than the market price when selling. 

Example:  

If the FTSE 100 index is trading at 5885.5 with a one-point spread: 

• The bid price (what you sell at) would be 5885. 

• The ask price (what you buy at) would be 5886. 

To learn more about the spread, please visit naqdi’s blog. 

What Makes Spread Betting Unique? 

Spread betting offers several advantages for traders: 

• Profit from Both Directions (Long and Short): You can bet on rising or falling prices with equal ease. Unlike physical stock trading, which makes short-selling difficult, spread betting simplifies this process to be similar to buying. 

• No Separate Commissions: The profit source for spread betting companies is the spread. There are no additional hidden commissions, making it easier for you to manage trading costs and accurately determine your position size. 

• Potential Tax Exemptions: In some countries, spread betting profits may be treated as “gambling gains” and not subject to capital gains or income taxes.  

*Important Note: Always keep records of your trades and consult your tax advisor before filing your tax returns to ensure compliance with local laws. 

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Spread Betting vs. Contracts for Difference (CFDs) 

Both spread betting and Contracts for Difference (CFDs) allow you to speculate on price movements without owning the underlying asset. CFDs are agreements between you and the broker to exchange the difference between the opening and closing prices of a trade. They are tradable even without physical delivery of assets, as the contract itself has a tradable value. While CFDs typically don’t have predetermined expiration dates, spread bets often do. 

Here are the key differences between them: 

Feature	Spread Betting	CFDs
Contract Core	Bet on price movement.	Agreement to exchange price difference.
Expiry Date	Often fixed at opening.	No fixed expiry dates.
Trading Fees	No separate commissions (profit from spread).	Includes commissions and transaction fees.
Profit Calc.	(Points moved x Bet size per point).	(Price difference x Trade size) – Fees.
Dividends	Subject to dividends (on long positions).	Subject to dividends (on long positions).
Tax Treatment	Often tax-exempt (in some regions).	Subject to capital gains tax.

To learn more about CFDs, please visit naqdi’s blog. 

What Do Margin and Leverage Mean in Spread Betting? 

Margin is the amount of money you deposit into your account as collateral to open and maintain a leveraged trading position. Using leverage is fundamental in spread betting, as it enables you to control a much larger investment value with a small capital deposit. It has expanded the range of opportunities available to individual traders, allowing them to participate in trades previously exclusive to large institutions. 

How Leverage Works in Spread Betting:  

Leverage (or margin trading) allows you to open large positions with a very small deposit relative to the total value. 

Example:  

Suppose you bet £10 per point on the EUR/GBP pair at a price of 0.8560. This trade is equivalent to a trading value of £85,600. Thanks to leverage, you won’t need to pay this full amount; perhaps only £2,850 in your account would be sufficient to execute the trade. 

How Margin Works in Spread Betting:  

Imagine you want to open a trade worth £10,000 in a market that requires a 20% margin (i.e., 5:1 leverage). You only need £2,000 in your account to execute this trade. 

Calculating Profits and Losses:  

Your profit or loss is calculated based on the total value of the position (£10,000), not just on the margin you deposited. This means your return will be magnified five times. 

In case of profit:  

If your position’s value rose to £11,000, your profit is £1,000. Relative to your initial deposit of £2,000, this represents a 50% return, which is significantly higher than the 10% return you would have achieved if you had to pay the full £10,000 upfront and didn’t use leverage. 

Remember:  

While leverage can amplify your profits, it amplifies your losses by the same magnitude, because the calculation is based on the total value of the position, not just the deposited margin. Therefore, it’s always essential to ensure you have sufficient margin in your account. 

Learn more about margin and managing leverage risk. 

Are There Any Risks to Spread Betting? 

Like any form of trading, spread betting carries risks that traders must fully understand: 

Margin Calls  

Traders who misunderstand leverage might take on positions larger than their financial capacity. This exposes them to “margin calls” which require immediate additional funds to avoid forced liquidation of the trade. 

*Advice: Don’t risk more than 2% of your capital per trade, and always be aware of the total value of the position you are opening. 

Wide Spreads  

During times of high market volatility, the spreads offered by spread betting companies can widen. This can trigger stop-loss orders prematurely and increase trading costs.  

*Warning: Avoid placing trading orders directly before important economic events or corporate earnings reports, as volatility increases and spreads widen significantly during these times. 

How to Manage Spread Betting Risk 

Effective risk management is essential for successful spread betting. This involves identifying the potential risks for each trade, then developing a clear plan to limit those risks. 

Protection Tool: Stop-Loss Order 

A stop-loss order is your primary tool for controlling losses. When used, you instruct the broker to automatically close your trade if the price reaches a certain point against you. This ensures a maximum potential loss is defined for any given trade, protecting your capital. 

In conclusion, spread betting is undoubtedly a powerful trading tool, carrying significant opportunities as well as risks. Smart trading isn’t just about choosing the tool, it requires deep and precise understanding and the application of strict risk management strategies. 

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