What Is Spread Betting?
This page is about financial spread bettting, Not odds spread betting.
With spread betting, you can make a profit on the fluctuations of assets without actually going through the trouble of buying and selling them. You can also make money even in falling markets.
A long row of underlying assets are available for spread betting, such as:
- Derivatives, such as options
- Foreign currency
- Exchange Trader Funds
Where can I do spread betting?
There are a lot of sites available online where you can register, make a deposit and start doing spread betting.
How does it work?
You sign-up with a spread betting broker and make a deposit into your account. Then click yourself over to the spread betting section to select something that you feel extra confident in predicting the price movements of, such as a specific company share price or commodity price.
The spread betting platform will show a prediction (spread) for how they think the price of the underlying will be at a specific point in time, such as closing time for that trading day. If you think that the prediction is too low, you BUY on the price and if you think it’s to high you SELL on the price. If your prediction is right, you earn money. If it is wrong, you lose money.
The company FootieFoo opened at 210p at the London Stock Exchange today. When you take a look at what the spread betting site predicts about the price, you see that it quotes 210p to 211p (the spread) for the trading day. This means that they think that the closing price will be within those limits. You, on the other hand, believe that the share will do better. Therefore, you BUY at £20 per point movement at 211p.
At close, the share price is at 214p. Your prediction was right – the share did better than 211p. Since you bought at £20 per point, you get paid £20 x 3 points = £60. If you had bougth at £40 per point movement instead, you would have been paid £40 x 3 points = £120, and so on.
So, what would have happened if you had bought at £20 per point movement at 211p and the closing price turned out to be 207p? You were wrong, so you have to pay the spread betting site. How much do you have to pay? 207p is four points below 211p, 4 points x £20 = £160. You have to pay the site £160.
As you can see, you can end up losing A LOT of money on spread betting if the underlying price takes a dive after you bought or skyrocket after you sell.
Some advantages of Spread Betting
- You can make a lot of money on small price fluctuations even if you don’t have a big bankroll to start with.
- In some jurisdictions, spread betting wins are tax-free while capital gains aren’t. This can make it extra beneficial to engage in spread betting instead of buying and selling equity and similar assets.
- Actually buying and selling assets can be expensive because of commission fees.
- You get access to a wide range of assets from all over the world and can gain exposure to them even if you, for various reasons, wouldn’t be able to actually buy them outright.