Benefits and risks of spread betting

With spread betting, you don’t have to put up the full value of a financial asset you want. Instead, you place a wager on the price movement. If the price goes in your favour, you win multiples of your initial stake. But note that even if spread betting offers enticing potential rewards, it also comes with risks.

Learn the main benefits and risks of spread betting to help determine if this trading style fits your strategy and risk tolerance.

Upsides to spread betting

Before examining the risks involved, it is helpful first to understand the potential benefits of spread betting and why traders may prefer it for certain assets.

Potential return in rising and falling markets

One major advantage of spread betting is the flexibility to potentially profit whether the markets are heading up or down. You simply place a buy bet if you expect prices to rise or a sell bet if you anticipate prices declining. This two-way trading capability widens the range of trading opportunities.

With traditional investing, you can only realistically make money if you buy an asset low and eventually sell it higher. Investors are limited to profiting from upward price moves. But spread betting allows capitalising when markets fall by selling/shorting instead of buying. Traders can develop strategies to exploit both rising and declining trends.

Read this article for more insights: What Is Short Selling?

Highly liquid markets with tight spreads

Spread betting providers offer live prices on thousands of markets across global stocks, indices, forex, commodities, cryptocurrencies, and more. This extensive coverage means you can easily bet on major asset classes and liquid instruments.

These tend to be highly liquid markets, enabling entering and exiting positions seamlessly. Lower liquidity markets have wider bid-ask spreads and more significant price slippage on order execution. But the most widely spread bet markets feature tight spreads, and reliable order fills.

The combination of thousands of markets and high liquidity makes spread betting operationally efficient. You can rapidly implement trades across geographic regions and asset classes without sacrificing execution quality.

Low capital requirements

Spread betting enables gaining exposure to markets with just a small percentage of capital required relative to the full position size. Most providers only need 10-20% of the bet amount to be deposited as initial margin. This means you can access greater market exposure and buying power than paying the full value of assets upfront, like traditional investing. More capital efficiency frees up funds for other investments or uses.

Of course, lower capital requirements come with greater risk due to the amplified leverage involved. But for traders seeking leveraged market access, the lower initial outlay is an advantage of spread betting. Just be mindful of the greater loss potential from that same leverage.

Potential tax advantages

Unlike traditional securities investing, in many jurisdictions globally, profits generated from spread betting fall under capital gains tax-exempt categories. This can provide a significant tax advantage compared to capital gains taxes on realised investment profits.

Always consult a tax advisor about your country’s specific rules and classifications. But this potential tax benefit is frequently praised as a major benefit to spread betting versus other trading vehicles that do incur capital gains taxes. The tax savings over years of trading can be substantial.

Just be aware that some jurisdictions may still impose taxes on spread betting profits above certain income thresholds. Never assume tax-free status without understanding your local regulations first.

Bet on a wide variety of markets

While stocks and forex are common spread betting markets, providers offer prices on hundreds of indices, commodities, bonds, interest rates, economic data releases, cryptocurrencies, and more. You can acquire exposure to emerging markets, precious metals, energy, and niches like cybersecurity and biotech stocks. The ability to spread bets on so many markets enables the implementation of diversified strategies across multiple asset classes.

You can spread bets on one of the leading trading platforms, markets.com. The platform offers various financial instruments you can choose from. Aside from that, markets.com has the best technical tools and fundamental analyses readily prepared for you to use and incorporate into your trading plan.

Downsides of spread betting

The benefits may seem enticing at first glance. Still, it’s crucial to temper your excitement and thoroughly understand the risks before attempting to trade spreads.

While the upsides are appealing, don’t let the benefits give you a false sense of confidence - be sure to carefully weigh the downsides before jumping into spread trading.

Potential for unlimited losses

A major risk is the possibility of unlimited losses if the market moves sharply against your position. When you buy an asset outright, the maximum loss is 100% of your investment if the price falls to zero.

With spread betting, losses can exceed your deposit and accumulated profits in your account. Since you are trading on leverage, even a small price move against you can lead to losses greater than your capital. This risk is magnified by volatility.

Margin calls from providers

When the equity in your spread betting account drops below the maintenance margin level, the provider will issue a margin call. This requires you to deposit additional funds quickly to maintain your current open bets.

The maintenance margin is usually lower than the initial margin, serving as a buffer zone before forced liquidation. Suppose you fail to meet the margin call by topping up your account balance. In that case, the provider has the right to close out open losing positions to restore the equity above the maintenance margin level.

Having positions liquidated at unfavourable prices during a margin call realisation can be devastating. You lose control and have your bets forcibly closed outright as losses are scaling. Prioritise proactive risk management to avoid getting into margin call territory in the first place.

Lack of regulatory protection

Spread betting accounts do not fall under traditional financial regulations designed to protect investor funds. Provider insolvency could jeopardise your capital and lock up positions. Be sure to thoroughly vet providers before opening an account.

Difficult to profit long-term

Given the leveraged risks, financing costs for holding overnight, wider spreads, and costs per trade, spread betting carries significant hurdles for consistently generating profits over the long run.

Most individual traders lose money spread betting across months and years of active trading. It requires excellent technical analysis skills, developing a tested trading plan, discipline in executing high-probability trades, and effective bet sizing and risk management.

Spread betting for short-term gambling or entertainment purposes will almost certainly lead to losses over time. Treat it as a serious trading profession requiring dedication and commitment to continued education. Always note that profits demand hard work, experience, and perseverance.

Easy to overtrade

The ease and speed of executing spread bets online make overtrading a common mistake. Just a few clicks, and you can be in a new position. This frictionless access encourages excessive trading, often out of boredom or overconfidence.

Overtrading leads to accumulating losses as the bid-ask spread, financing costs, and commissions slowly bleed away your account balance. The market’s random short-term noise also overwhelms any potential edge with overtrading. Patience and discipline are required to succeed.

Overtrading often stems from a lack of a clear trading plan. You have no systematic rules for entry and exit, so you trade impulsively based on emotions and hunches. Create a detailed trading plan and stick to the parameters to avoid the temptation to overtrade.

Check this interesting article: 5 Common Trading Mistakes To Avoid

Now that we have covered the key points

The benefits and risks of spread betting are essential points for anyone who wants to dive into this type of trading. Major upsides include profiting from rising or falling prices, low capital requirements, liquid markets, and potential tax advantages.

However, the risks are equally amplified by the leverage involved. You can lose far more than your deposit if the market moves against you sharply. Overtrading, excessive leverage, and mismanaging risks can lead to blowing up your trading account.

Therefore, traders should thoroughly educate themselves on the benefits and risks of spread betting, craft a risk management system and position sizing, and develop a disciplined trading plan before attempting to spread the bet.

Practise spread betting on markets.com

For those new to spread betting, markets.com offers a risk-free demo account where you can practise trading strategies without putting real money at stake. The demo provides a realistic simulation using live market pricing and order execution. Once you have gained experience and confidence through extensive demo trading, you can seamlessly upgrade to a live account to start spread betting actual capital.

The hands-on experience will help ensure you have developed effective risk management techniques and are ready to transition to actual money trading prudently.

At markets.com, we know the risk imposed by spread betting. That is why we want you to learn more about trading. We offer Trading 101, which provides tips, strategies, and how-to guides. Our trading definitions make it easier to understand complex terms.

Learn and trade with markets.com: The ultimate trading community!

When considering “CFDs and Spread Betting” for trading and price predictions, remember that trading CFDs and Spread Betting involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.”