Spread Betting Explained

Spread betting is an alternative option for investors to traditional trading on the stock market.  It’s tax free, and offers the opportunity to make a profit whether the market goes up or down. It offers access to a wide range of markets from Indices (like the FTSE), or individual shares to commodities or currency exchange rates.

The Bet: Unlike traditional share-dealing, you never own the actual share or commodity. You are simply making a call on whether you think it will go up or down in value. You stake a certain amount of money per point movement – the more it moves in your favour the more money you make, the more it moves against your prediction, the more you lose.

The Spread: The spread is the difference between the price you can buy at and the price you can sell at. You will buy at the higher price if you think the market will rise (Go Long), or sell at the lower price if you think the market will fall (Go Short). The tighter the spread, the smaller the market has to move for you to make a profit.

What can I Spread Bet on?

Stock market indices - This is the most commonly traded market in spread betting. Most trade on the FTSE 100 or the Dow Jones, but other indices like the Nikkei 225, the Nasdaq, S&P 500, or DAX can also be attractive.

Individual Shares – Shares in individual companies from any market in the world

Commodities -  Energy resources such as Brent Crude, US Crude, Natural Gas etc ; Metals like Gold, Silver, Copper etc ; or Softs like Wheat, Cattle, Soybeans and so on.

Currencies – Foreign Exchange (Forex or FX).  Popular currency pairings like the GBP/USD, or GBP/EUR or USD/JPY and many more.

Interest rates and Bonds – Short term or long term interest rates, Government Bonds or gilts.

How does a Spread Bet work?

First, you select your market – Let’s take an individual share e.g. Tesco.

Start by checking the price quoted by the spread betting company – it will reflect the actual share price.  There will be always be two figures – the sell price and the buy price, the sell price will be lower. For example, it could be 749-751.

You must decide if you think the price of Tesco shares will go up higher than the buy price, or fall lower than the sell price. If you think higher, you “buy” at the buy price, if you think lower you “sell” at the sell price.

Now, you must decide how much you are betting, that is, what your stake is – this is the amount of money you gain or lose per point of movement on the value of the share. It is always expressed in currency per point of movement e.g. £5 per point.

In spread betting you do not have to pay the full cost of what the share would be to buy – You will only have to pay a percentage - this is called trading on margin. But spread betting companies will require you to have a certain amount on deposit to cover potential losses (exactly how much varies from company to company and this figure is often called the Initial Margin Requirement).

When you buy to open your trade, you must buy at the higher price, and when you close that trade, you must close at the lower price being quoted at the time you close.

If you sell to open your trade, you sell at the lower price, and when you close the trade, you must close at the higher price quoted at the time.

You can close a trade at any time whether you are making a profit or a loss. You do not have to meet any specific value on any specific date.

A Spread Bet Example