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Spread betting is an excellent way for bettors and investors to earn from financial instruments without purchasing or owning them. But what is spread betting, and how can you make money from it? Spread betting allows bettors to speculate how the price of an asset moves and profit off of correct predictions. Participants can make considerable profits with no capital gain tax on their earnings.
In a recent survey in Britain, less than 1% of the respondents (0.3%) participated in spread betting in 2023. The same figure was recorded in 2022, showing no decrease or increase in spread bettors. If you want to hop on the spread betting bandwagon, here’s everything you need to know before taking the plunge.
In This Guide
What Is Spread Betting?
Spread betting involves betting on the price movements of financial instruments like indices, options, and stocks. Instead of trading actual assets, spread betting deals with derivatives, which are financial contracts that gain value from their underlying assets.
For instance, instead of buying actual Apple stock, holding it, and selling it if the price climbs, spread bettors bet on Apple stocks increasing in value. They’ll then make money if stock prices rise and lose money if they do the opposite.
How Does Spread Betting Work?
Spread betting involves speculating on the direction in which the price of an asset moves. Essentially, it’s making a bet on whether a financial instrument’s price goes up or down. Unlike trading, it doesn’t involve buying or owning the actual asset. Spread bettors make money when the asset’s value moves in the direction they bet. Conversely, they’ll lose money if the asset’s value moves in the opposite direction.
How to Spread Bet
Spread betting is as easy as trading or investing in financial markets. Below is a quick breakdown of how to spread bet successfully.
Step 1: Choose a Trading Platform
Step 2: Learn the Betting Strategies
Step 3: Pick Your Market
Step 4: Set Your Stake
Step 5: Decide Your Direction
Step 6: Implement Appropriate Risk Management Tools
Step 7: Place Your Bet
The first step in spread betting is choosing an appropriate platform to facilitate your bets. There are plenty of UK spread betting companies to choose from, so it’s up to you to explore the available spread betting sites and pick a licensed and reputable trading platform.
While spread betting is mostly speculation, you can adopt certain strategies to make accurate price movement predictions, maximise profits, and minimise losses. Most trading platforms have educational resources where you can learn about these strategies, but you can also research the World Wide Web for the same.
Spread bettors can bet across various markets, including the stock, forex, indices, and options market. Markets move differently, so it’s a good idea to pick a market you’re familiar with. Also, stick to betting on one market and using the same spread betting sites until you’re comfortable enough to diversify.
The stake is the amount of money you want to risk for every point the asset moves. Higher stakes equal higher rewards but also more negative returns if the market doesn’t move in your favour. Beginners should set their stakes lower while learning the ropes to minimise losses. A £20 stake means you’ll gain or lose £20 for every point the asset price moves, depending on your position.
You can either go long (buy) or short (sell) your betting poison. Going long means you expect the price to increase; while going short means you expect it to decrease.
Smart bettors use different risk management tools to cut their losses. Some use stop-loss orders, which automatically close their positions if the asset reaches a specific price. This ensures that losses are capped at that price. Some also use take-profit orders, which close their positions after the asset reaches a particular price, taking the profit they made from the bet at that price point.
With everything in place, you can now place your bet and wait eagerly as the asset price moves in or against your favour. If you’ve done appropriate research on the asset and implemented appropriate risk management strategies, you’re likely to make a profit. However, you’ll likely lose your hard-earned cash if you place your bet on impulse or use emotion and ignore risk management tools.
3 Main Features of Spread Betting in the UK
To understand how spread betting works, you must first understand the key features of spread betting. Spread betting consists of three main features: the spread, the bet size, and the duration. Other elements in spread betting include the direction, leverage and margin. We’ll look at these key elements in detail to further your understanding.
- The Spread
Spread is simply the variation between two prices, rates, or yields. It seems simple enough, but its meaning varies contextually. The spread in stocks is the gap between the buy and sell price. In bonds, it’s the difference in yields between two securities.
All in all, the spread is the disparity between the buying (bid) and selling (ask) price. The spread is also what you’ll pay to open a spread betting position on the market of your choice. It often entails all the necessary costs of opening a position, including trading fees, eliminating the need for commissions and separate charges.
Trading platforms markup the buying and selling price by half the total spread amount. Let’s say the NASDAQ: QQQ has a one-point spread. This means the buying price is half a spread about the actual buying price and the selling price half a point below the selling price.
- Bet Sizes
The best size is how much money you allocate to each trade/bet. The larger the bet size, the more money you’ll make if the bet goes your way and the more you’ll lose should it not.
For instance, if you bet £10 that Tesla stock will go up, you’ll get £10 for every point the stock increases. If it goes up by 4 points, you’ll earn £40, 5 points, £50, and so on. The opposite is also true if the stock plummets. For every point the stock decreases, you lose £10.
- Duration
Duration is the amount of time your spread betting position remains active. Different platforms have varying spread bet durations, usually lasting anywhere from a day to a few months. Some of the most notable spread bet durations include:
- Daily bets: Daily bets are bets that you can run for as long as you want to but will close at a set time in the future. They have tight spreads, but you’ll have to pay a roller fee should you fail to close the position before the trading day ends.
- Quarterly bets: These are bets whose positions close automatically at the end of a quarterly period (3 months). You can roll over the bet to the next quarter but at a fee. Also, their spreads are much wider than daily bets but typically have lower funding fees.
It’s worth noting that bettors can close their bets whenever they wish in both types of spread bets. However, for quarterly bets, the position will close automatically after the end of the third month.
That said, spread betting has other features, such as the direction in which the market moves. Going long in spread betting means buying a position while anticipating its price increase. You’ll make money should the asset’s price increase and lose if it doesn’t. Going short, on the other hand, means opening a bet position and anticipating an asset price decrease. If the asset’s value decreases, you make the correct bet and profit from your bet. The opposite is true if the value goes up.
For instance, let’s say you decide to go long on the price of gold with a bet size of £50, anticipating a bullish trend. After opening your position, the price of gold rises by 3 points. This means you’ve made the correct bet, and the platform will deposit £150 into your account. If you went short, however, you would lose £150.
Margin in spread betting is the deposit you put down to open your position in your preferred financial market. Platforms have different margin requirements, but most will have two types of margins.
- The deposit margin: This is the minimum deposit you need to fund your account to open a position. It’s usually a fraction of the asset price and only represents a percentage of the total trade amount.
- The maintenance margin: This is additional funding to maintain the position you opened or to finance any losses. It includes the rollover fees and losses. In dire situations, the platform will ask you to top up your account (margin call) before you get a negative balance.
Leverage allows spread bettors to open positions with multiple times your Margin amount. With leverage, you can bet multiple times the amount to make more money. However, trading with leverage also means multiplying your losses like your gains.
A platform offering a 1:100 leverage on spread bets will give you 100 times the betting amount you deposit to fund your bets. If you fund your bets with a 10-pound margin, you’ll have £1000 to bet with. £20 will give you £2000 for your spread bets. The only downside to margins is that it also magnifies your losses, and you must use proper risk management strategies to avoid losing too much.
Spread Betting Risks in the UK
Spread betting involves multiple risks that could lead to losses. These risks include:
- Market volatility/liquidity risk: The financial markets are very volatile. Liquidity risk is the possibility that the asset price could quickly go against your position, leading to considerable losses.
- Margin or leverage risk: Leverage risk, on the other hand, is the risk that leveraging your trade could increase your losses. The higher the betting leverage, the more you could lose if your bet doesn’t convert.
FAQs
How does spread betting differ from traditional investing?
The main difference between UK spread betting and traditional investing is that spread betting doesn’t involve actually purchasing the asset. Instead, participants bet on the direction of the asset in question. This also means you don’t own the asset and don’t directly profit from it. Instead, you make money when the asset price moves in the direction of your bet.
How are profits and losses calculated in spread betting?
Calculating profits and losses in UK spread betting depends on how many points an asset’s value moves. The simple formula for calculating how much you make spread betting is subtracting the closing price from the opening price and multiplying it by the stake you placed per point. You’ll assign positive and negative values on the closing price, depending on whether you went long or short.
How does leverage work in spread betting?
You can think of leverage as a loan the platform gives you to increase your margin when opening positions. These platforms usually represent leverage in ratio form like 1:100 or 1:250. For the former, the platform will offer you 100 times your margin amount and 250 times for the latter. The higher the leverage amount, the more profit you get, but also, the more losses you’ll incur if your bet goes wrong.
What should you look for when choosing a spread betting platform?
There are several factors to look for when you want a top-tier spread betting platform. The first and most important factor is the platform’s regulation. Only choose a platform with licenses and regulations from top governing bodies like the FCA, FINRA, and others. Next, you’ll want a platform with a large variety of tradable assets, robust security features, tight spreads, and massive leverage. You should also check out reviews and testimonials online to find the most appropriate platform.
Final Thoughts
Spread betting is an excellent way to make an honest living or add to your current income, provided you find the right spread betting platform. Now that we’ve answered, “What is spread betting?” it’s up to you to find an appropriate platform and place your bet.
Remember, only bet on a single financial market and understand it fully before diversifying your betting portfolio with another market. Also, betting is just as risky as trading financial assets. Only bet what you’re willing to lose and use appropriate risk management strategies to reduce your losses. With proper research, practice, and risk management, you’ll be set to make a killing with spread betting.
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