A Guide to Spread Betting
What You Need to Know
- You can wager on a range of financial products.
- Winnings from spread betting in the UK are tax-free.
- You can win much more from your initial wager than with most other forms of betting.
- It is possible to profit from rising or falling markets.
- You can stop and take your money at any time.
- You can limit potential losses automatically with a stop-loss.
- A stop-loss may also limit the amount that you can win.
Spread betting applies the traditional principles of gambling to the financial markets and trading indices. Spread betting means that you can speculate upon shares and indices without having to own them. It also means that the falling markets are just as important as the rising ones.
Spread betting is based upon margins which means that the whole value of the stock is not bet upon. An Initial Margin is set, which will be a percentage of the stock value. This means that the volatility of spread betting is very high. An obvious advantage to spread betting is that any winnings are exempt from Capital Gains Tax or Stamp Duty. Since most shares are taxed at a rate of 40p in every pound for profits after the first £7900.
The principals of spread betting can also be applied to Sports Betting, and indeed often are. Thus we have Financial Spread Betting and Sports Spread Betting.
Spread Betting was originally intended for serious traders since the complexity of trading can catch out novice traders. With this in mind most Spread Firms or Spread Bet Brokers set the account size to £10 000 to allow serious traders to take part. They often require proof that you can honour debts that you may incur.
Novices are not totally excluded since some brokers give the option of Non Credit Accounts or Limited Risk Accounts which have Stop Losses built in for added security. These will cap potential losses to minimise your losses.
How It Works
Spread Firms will give traders a quote on the results of a given event. In the case of financial markets it could be the position of the FTSE 100 index. A sports spread bet could be placed on the outcome of a football game. For a financial spread bet it is usual to place a stake upon the FTSE 100 at a pound per point on the direction of the market.
In the case of financial markets it could be the position of the FTSE 100 index.
- If you think that the FTSE 100 index will rise and therefore decide to place a £1 per point spread bet, then if it started at 4250 and rose to 4300 you would make a £50 profit. This is all dependent on the Spread Quote given to you by your Spread Firm.
To bet on the rise in the index you have to take account of the highest value i.e. 4300 in this case. (Remember that the actual value of the stock is £4250 of which you are betting a small deposit usually 5%).
- If the FTSE 100 begins to fall from 4250 and you sold it when it reached 4200 then you would make a loss of £50. Conversely you can bet upon the fall of the index too.
With regard to sports spread betting, the outcome of any sporting event can be speculated upon. Unlike conventional bookmakers, spread betters do not offer fixed rate odds.
- For example, if you think that England will win the Football World Cup, you will be given a Performance Index by the Spread Firm based upon a point system. For example: 150 points to win, 100 to get to the semi final and 100 to get to the quarter final. If the quote is 25 to 28 and you think that the England team will get to the semi final with your bet of £20, then the results will be as follows. 100- 28 = 72 x £20 = £1480. If they get knocked out before the semi final then you would lose 28x £20 = £560
Stop Loss Protection
Spread betting is not suitable for the novice trader. It is therefore wise to choose a Non Credit Account as mentioned above. Security lies with the automatic stop losses which will come into play if the stock that you bought starts to fall.
Types of Spread Betting Account
Spread Bet Deposit Accounts - This account is easy to open, all you have to do is deposit a cash sum with a Spread Bet Broker and use this for trading purposes. There is no need for an in depth credit check; however that does not mean you will not be screened to see if you are suitable. Another advantage of this type of account means that trading within your means is an essential discipline that you will learn.
Spread Bet Credit Accounts - A credit account means that no money is deposited into the account, instead credit is offered. However the procedure in acquiring credit means that the broker will check your credit rating as well as making sure that you have enough funds to open an account, in addition to covering any losses that may occur when you start trading. The more assets you have the higher the credit limit, although this can be capped.
Spread Betting Terminology
Buy - Means you are betting that the higher value of a quote will be exceeded.
Sell - Means you are betting that the lower value of a quote will not be reached.
Spread - This is the difference between the Buy and Sell prices.
The Single Index - The simplest form of spread betting, this type of index is independent of all other scores and events.
Multiple Index - Several players or teams competing in an event choose to create a market. The highest point value being awarded to the highest scoring player or team. This is used to calculate the win or loss.
Make-up - This is the point value attributed to a given event at the conclusion of the event. This is used to calculate your final win or loss from your Buy or Sell position.
Mid Point - This is the point value exactly half way between the Buy and Sell prices, it can be used to determine the make-up of a market when an event is prematurely halted or withdrawn.
Things to remember
- Before you embark upon spread betting make sure you understand the principals behind it. Do your research; it is best to be prepared for all outcomes.
- Do not be fooled by the high rewards that you can win with spread betting; the risks are also high too. Be aware that winning at spread betting is about controlling the risks at a steady rate.
- If you are a newcomer to spread betting; be very strict about how much you trade. Start small until you get used to trading. Then you can increase your trading amounts when you feel more confident.
- Always remember to cut your losses, and never invest more money into a failing deal; so it is always best to use stop losses.
If you are ready to take part in financial or sports spread betting then why not click on the links below to take a look at our selection of spread betting sites.
- For more information, please visit the Financial Services Authority, which is responsible for regulating the spread betting market.
- Visit Bloomberg's site for up-to-date market intel on stocks, shares and commodities.
- You might also enjoy our articles that explain binary betting and spread betting on sport.