How does spread betting work?

spread betting

Spread betting is a way of speculating on the price movements of a given financial instrument, and works by tracking the value of an asset, without having to take ownership of it. The “spread” in this situation is the difference between the highest price at which a buyer is prepared to buy, and the lowest price at which a seller is prepared to sell.

To spread bet, you place a bet on whether you expect the price of the financial instrument to go up or down, then make a decision to buy if you expect it to rise (“opening a long position”) or sell if you expect it to fall (“taking a short position”).

Bet sizes

When you spread a bet, you stake a certain amount of money on each point of movement in an asset’s price.

For example, if a UK share moved one penny in the underlying market, that’s the equivalent of one point. (Note that what constitutes a point can vary between different markets and providers.)

You can bet however much you want per point of movement, subject to your provider’s minimum bet size. Your profit or loss is the difference in points between the opening and closing prices, multiplied by the amount you’ve staked per point.

Example

Steve believes that Oil Company P’s value is set to rise. Its shares are currently priced at £20 in the underlying market, and Steve’s spread betting provider is offering Oil Company P at a spread of 1995/2005.

UK shares are quoted in pence, so this is the equivalent to a bid price of £19.95 and an offer price of £20.05.

Steve places a ‘buy’ bet at the offer price of 2005, staking £5 per point.

A positive earnings forecast causes Oil Company P to surge to a market price of 2200. It’s now quoted at 2195/2205.

Steve decides to close his position, ‘selling’ at 2195.

The underlying market has moved 200 points (from 2000 to 2200), however Steve’s profit is based on a 190-point movement (from 2005 to 2195). This is due to the spread.

As Steve bet £5 per point, his profit is calculated like this:

£5 x 190 = £950.

Bet types and costs

Daily funded bets

Daily funded bets (which may be known by various names from different providers) will stay open for as long as you want. They are given a nominal expiry date at some distant point in the future – usually many years away – but you’re free to close your position at any time before this, whenever the market is open for trading.

If you want to keep a daily funded bet open overnight, most providers will charge you a fee for doing so. These are called financing costs or overnight funding charges. So, for each day your position remains open you’ll have additional costs. This means daily funded bets are generally used to speculate on short-term market movements only.

Quarterly bets

Quarterly bets are bets that expire at a specified date before the end of a given quarter. However, just like a daily funded bet or digital 100, you can close your position at any point before expiry if the market is open. You can roll quarterly bets over into the following quarter if you let your provider know in advance, although there may be a charge for this.

The cost of keeping a quarterly bet running to its expiry date is factored into its quoted price. This means the price for quarterly bets will typically differ from the underlying market value, and the spreads on quarterly bets are often wider than daily funded bets. For this reason they are generally used for longer-term positions.

spread trading chart

The cost of spread betting

As well as the overnight funding charges mentioned above, and the spreads we discussed in the last section, there are a few other costs associated with spread betting. These will apply whether you win or lose, although the amount you pay will vary according to your provider and the dealing strategies you use.

Margin

Margin is the amount of money you need as a deposit in your account to open and maintain your positions, so it’s a key factor in the affordability of spread betting. We explain how margin works in the orders, execution and leverage course.

Different spread betting providers will require slightly different levels of margin, and rates tend to vary across markets, according to the underlying conditions.

While you have a bet open, your margin payment is assigned to it and can’t be used for anything else. However, this money is released as soon as you close the position.

Currency conversion fees

When you place a spread bet, it will be denominated in a particular currency. More often than not this will be in pounds – eg £10 per point – which will usually also be the base currency of your account. If, however, you are able to place a bet in a currency other than your base, you may need to pay an associated conversion fee.

For instance, many spread betting providers give you the option of betting on US shares in US dollars per point. In these cases, before your account can be credited or debited with any profit or loss, the dollar figure needs to be converted back into pounds, which may incur a fee.

Why do people spread bets?

Tax-free profits

When you trade financial assets in the traditional way, you normally have to pay capital gains tax (CGT) on any profits you make. However, spread betting is classed as gambling, which is exempt from CGT.

It’s also free from stamp duty – a tax you typically face when trading shares. That’s because you never physically own any shares with spread betting, you just bet on their value.

Remember that tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.

No commission

If you trade physical financial assets through a broker, you’ll normally pay commission. This doesn’t apply with spread betting as the charges are typically included in the spread.

Since brokers often charge a minimum fee for every transaction, paying a spread is usually cheaper than paying commission on an equivalent transaction, particularly for smaller deal sizes.

Capitalising on falling markets

In traditional trading, you normally buy an asset in the hope its value will rise, so you can sell for a profit. However, with spread betting you can equally well take a view on an asset you expect will fall in value – known as going short.

As you’re simply betting on the direction you think a price will take, you can keep dealing even in bearish markets.

24-hour dealing

Most markets have set dealing hours. The FTSE 100, for example, is only open from 8am to 4.30pm in the underlying market. Ordinarily, after it closes for the night, you’d have to wait until the following morning before you can deal.

Leverage

With conventional trading you generally need to pay the full purchase price of an asset up front. Spread betting, however, is a leveraged product. So when you place a spread bet your provider will ask you to put up a sum representing just a fraction of the total value of the position.

Leverage gives you a relatively large exposure to a market with just a small deposit. For example, imagine you wanted to spread bet on gold; without leverage, buying one ounce of gold might cost £800. However, your spread betting provider only charges an initial deposit margin of 1%. This means you need to put down a deposit of just £8 to open a position on an ounce of gold.

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