A beginner's guide to spread betting

Spread bets offer an alternative way to trade the markets compared with CFD trading. In this guide, we show you how to get started with spread betting.

Spread Betting 

What is Spread Betting? 

Spread betting is similar to CFD trading with some key differences. 

It is a tax-free, alternative to traditional trading or CFD trading. 

Spread betting lets traders speculate on the movements of stocks, shares, and other and instruments and assets without owning them. 

That makes Spread Bets derivatives, like CFDs. 

Instead, you are speculating on what’s called on a spread.  

A spread is made around an underlying market, for instance, gold. In fact, spread betting originated in gold trading markets. 

With a gold spread, you would be betting on whether the price of gold would rise or fall. 

So, if the price of gold goes up, then you can make a profit. However, if it goes down, you can lose money. 

We will tackle the specifics later. 

Spreads are tied to a huge range of markets. Traders are able to pick from the usual range of markets, and instruments, such as forex, commodities, stocks, and so on. 

Remember: like CFDs, spread bets are leveraged products. Betting is inherently risky, so you should only start spread betting if you have enough capital and are clear of the relevant risks. 

The Spread 

The spread is the difference between the buy and sell prices of the underlying asset’s market price.  

In the context of spread betting, buy and sell prices are also known as the offer and the bid.  

Spread bet costs are factored between the buy and sell prices. Usually, you’ll buy a bit higher than the marketplace and sell just below it. 

Let’s use the FTSE 100 as an example. As a market index, its performance is measured in points. 

If the FTSE 100 is trading at 6,000.5, and the spread is one point, the Offer Price (buy price) would be 6,001. The Bid Price (sell price) would be 6,000. 

Bet size 

Bet size is the amount you want to bet on a unit of movement of the underlying market you’re trading on. 

The way profit or loss is calculated on spread betting comes from the difference between the opening price and the closing price of your market multiplied by your bet value. 

Let’s look at an example. 

You open a £5 per-point bet on the FTSE 100. It moves 100 points in your favour. Therefore, your profit would be £500: 

• £5 bet 
• 100 point movement 
• £5 x 100 = £500 = £500 profit 

The reverse is true for losses: 

• £5 bet 
• -100 point movement 
• £5 x 100 = £500 = £500 loss 

Bet Duration 

Bet duration is the length of time that passes before your position closes. 

All spread bets have a fixed time duration. They can vary from just a day to several months, depending on the asset and market conditions. 

Short-term positions may just be daily, for example. These may subject to overnight funding charges, so please be aware of that.  

Why trade via Spread Betting? 

Spread Betting presents many benefits when compared against traditional share trading. 

Tax efficiency 

Spread bets are popular because, in the UK, you do not currently pay any capital gains tax on profits made when spread betting. 

UK traders who spread bet also do not pay any stamp duty on their profits. This is because they do not own the underlying asset they are trading. 

Please be aware that tax treatments are dependent on individual circumstances and can be liable to change. Other jurisdictions will have their own tax laws. 

Variety 

Spread bets can be placed across a wide variety of different markets.  

Markets available include: 

• Shares  
• Foreign currency (Forex) 
• Indices 
• Commodities 

2,200 different options are available for you to bet on via the Markets.com platform giving you free rein to spread bet as you like. 

Low capital requirements 

Much like their cousin the CFD, spread bets are leveraged products. You bet using leverage and margin.  

This means you do not have to place down the entire value of the asset you wish to spread bet on, only a percentage. How much will depend on the margin, but it means you can start betting on a budget. 

For example, with 5% margin on a spread bet, you could open a position worth £30,000 for £150:

(5% x (£5 x 6000)) = £150

Even so, it is always best to consider if you have enough capital to spread bet with. Spreads are subject to market volatility. They can go up, but they can also go down. Always be aware of the risks when spread betting. 

Flexibility  

You can take long or short positions on spreads. 

If you think prices on the spread will rise, then you take a long position. 

Likewise, if you think prices on the spread will fall, you will take a short position. 

This means you can trade on markets that are going down as well as up and still potentially make a profit.  

This offers traders quite a lot of flexibility – another reason why spread betting is a popular way to trade. 

Hedge your share portfolio 

If you are already trading shares, and have an existing portfolio, then spread betting can help you offset some risk or limit your losses. 

In this case, you might want to use a spread bet against an asset that is moving in a different direction to your existing shares. 

Let’s say you own shares in Apple. The company has underperformed according to its latest earnings report, so its shares are sliding. You may want to open a short spread betting position on the Nasdaq technology index to offset your losses.  

This would mean that any loss to one position would be offset by profit to the other. 

Risks of Spread Betting 

Like any financial product, spreads hold inherent risks. 

Please read the below carefully and understand the potential risks you will undertake if you decided to start spread betting. 

Spreads are Leveraged Products 

Leveraged products like spreads give you market exposure for a percentage of the full trade you wish to make. This means that you can potentially make profits if the market moves in your favour. 

You can also lose money if the market moves against you and you are not using adequate risk management tools. 

Let’s look at an example. 

If you bet on a spread worth £1,000 with a margin rate of 5%, you would only have to put down a deposit of £50. 

However, if the price of the spread moves against you by 10%, you would lose £100, i.e. double your initial stake in your initial bet. 

This is because your exposure to the market, i.e., your risk is the same as if you had purchased £1,000 worth of physical shares, foreign currency, commodities and so on. 

This means that any move in the market will have a greater effect on your capital than if you had purchased the same value of shares.  

Some account types, however, such as retail client accounts have negative balance protection. That means losses will be limited to the value of the funds in your account. 

Market volatility & gapping 

Markets are inherently volatile. They can go up, but they can also go down. 

Small changes may have a big impact on returns when it comes to spread betting. 

These are similar to the types of external factors that can affect CFD trades, such as government policies, unexpected information and unforeseen changes in market conditions. 

Margin calls may also be applied due to negative effects on the spread’s underlying asset. If they cannot be met, the provider may close your position, or take a loss. 

Gapping may also occur. Gapping happens when prices of instruments suddenly shift from one level to another skipping any intermediate levels. 

The above may also mean stop-loss orders are applied to your open-spread positions. 

Client Money Risk 

There are client money protection laws that apply to spread betting in countries where such trading is legal. 

They are designed to protect investors from potentially harmful practices from irreputable financial product providers. 

Money transferred to spread providers must be kept separate from the provider’s money. This is to prevent providers from hedging their own investments. 

Even so, some laws may not prohibit clients’ money from being pooled into one or more accounts. 

A provider withdraws an initial margin when a contract is agreed upon. The provider also has the right to request further margins from pooled accounts. If clients in the pooled account cannot meet margin calls, the spread provider has the right to draw from the pooled account. This can have a negative impact on returns. 

How to Start Spread Betting 

Here is a quick guide on how to start spread betting. 

Much of the basic principles of CFD trading also apply to spread betting, but there are some differences, which we’ll explain in more detail in this section. 

Margin & Leverage: a reminder 

As with CFD trading, margin and leverage are the two main concepts you need to know before you start spread betting. 

Margin is the money you need to lay down in order to open a leveraged trade, i.e. betting on a spread. 

Both the terms are related. Leverage, based on the leverage ratio, determines the amount of margin you need to have in your account to begin. 

Remember: margin rates vary across different regions and asset classes.  

Leverage lets you gain full exposure to a market without investing the full amount of an underlying asset. You only need a small fraction of the normal capital. 

Margin value is needed to open a transaction. It will be held as collateral until the relevant transaction is terminated. 

The amount of the margin payments is dependent on the leverage ratio of the CFD, the underlying financial instrument and the contract value of the transaction. 

Decide what you want to trade 

Markets.com offers thousands of assets you can place spread bets on, covering sectors such as: 

• Shares  
• Foreign currency (Forex) 
• Indices 
• Commodities 

Don’t forget to use the in-platform streaming service XRay and our Insights service for advice on the leading stocks, indices performance, and current affairs information, to help you decide.  

Build your trading plan 

Think about what you want to achieve from spread betting. Remember to ask yourself the key questions: 

• How much profit are you hoping to make? Will spread betting help you achieve that? 
• How much time can you realistically spend trading? 
• How much can you safely spend? 
• Are you comfortable assuming the risk?
• What does acceptable loss look like to you? 

Answering them will give you a clearer picture of how you wish to proceed and what trading strategy you want to undertake. 

Open your first position 

When you’ve decided which market you want to trade, you’re ready to bet on a spread. 

The first thing to decide is whether you want to go long or short.  

• If you think the spread will rise, you take a Long Position. 
• If you think the spread will fall, you take a Short Position. 

Once you’ve taken your position, your profit or loss will move in line with the underlying market price. You can use the Markets.com platform to monitor all your open spread bets. 

Putting spread betting into practice 

Let’s look at a spread bet using Google as an example so you can see how the theory comes together in practice. 

In this example, Google is currently trading with a sell price of 11,550 points (£115.50). The buy price is £115.60. 

Because of its recent good earnings, you predict that Google shares are going to rise soon. As such, you decide to take a long position (or buy) Google shares for £10 per point of movement at the buy price, or 11,560 (£115.60). 

If your bet is correct, and Google share prices do rise, you might want to trade when the sell price hits 11,590 (£115.90).  

The market has increased by 30 points (11,560 – 11,590). As such, your bet would have turned a profit of £300 (30 points x £10 = £300). 

However, markets are volatile. They can rise as well as fall. Below’s an example of what would happen if the market moves against you. 

The price of Google shares has fallen to a sell price of 11,510. That would mean you would end up with a loss. 

The market has moved 50 points (11,560 – 11,510). Therefore, you would have made a £500 loss (£50 x 10 = £500).  

Start trading your way with markets.com 

Now you know your way around spread betting and CFD trading, put your knowledge into practice with Markets.com. 

Remember: spread betting carries a significant risk of capital loss. Only take part if you can afford to take any potential losses.