What is Spread Betting and How Does it Work?

Spread Betting offers a way for traders to speculate on the future price direction of a market. It is a type of financial derivative product that does not require direct ownership of assets; in other words, you do not own the underlying shares, units or stocks, instead you simply open a position based on whether you think the price will go up or go down. If the market moves in your favour, you can close your position for a profit.

While this is an indirect way of trading the market, Spread Betting allows access to different types of markets, including stocks, commodities, forex, indices and more, offering investors with a range of potential trading opportunities.

Furthermore, Spread Betting is leveraged, which means you can use a small capital to control a larger position. Note that leverage amplifies both profits and losses, as the outcome is calculated on the full position size.

Another characteristic of Spread Betting is that it may be less costly compared to other investment methods – provided you pick the right brokerage after carefully considering your personal risk management, financial circumstances, or need. Check out our low fees and competitive spreads here.

Spread Betting plays on price movements that naturally occur as the markets trade. This inherent volatility is what creates opportunities for traders to trade Spread Betting.

During Spread Betting, a trader opens a position based on their estimation of which way the market will go – up or down. Should the market move as predicted, the Spread Bet furnishes a profit. If the market moves against prediction, the Spread Bet incurs a loss to the trader.

There are three key concepts to know about Spread Betting.

Long and short trading

Note that Spread Betting allows investors to take positions in both directions of the market, potentially profiting if the price goes up or down. This, in comparison to conventional buy-and-hold strategy, only offers profit when prices go up.

If a trader believes the market will go up, they could open a Long position to buy the market. If the price increases from the level at which the Long position was opened, the trader makes a profit. However, if the price decreases, the trader takes a loss.

If a trader believes the market will go down, they could open a Short position to sell the market. If the price decreases from the level at which the Short position was opened, the trader makes a profit. However, if the price increases, the trader takes a loss.

Leverage

Spread Betting utilises leverage, which accords greater capital efficiency. Leverage allows you to trade without putting up 100% of the capital required. For instance, if you plan to go long on (aka purchase) 100 shares of a company trading at $100 per share, you’d need to put up $10,000 in capital.

However, with leverage, you can open the same position with only a fraction of the capital required. This means you can gain full market exposure while tying up less of your own funds. However, do note that with higher leverage, while your potential returns may increase, your losses can be amplified significantly as well.

Thus, in Spread Betting, your capital can be used to control comparatively more positions and trades. Or, you can start trading your preferred market or assets with a much lower capital. You are reminded that trades with leverage carry a huge risk.

Margin

The initial deposit required in Spread Betting is known as the margin. The margin rate will vary according to different factors, such as the market or asset being traded. For instance, a Spread Bet on stocks may require a higher margin compared to a Spread Bet on a forex currency pair, which typically has a lower margin requirement (subject to change).

There are two types of margins you need to know.

• Deposit margin: This is the initial margin required to open the Spread Bet position. It is deposited when making the trade.
• Maintenance margin: Should your position move against your prediction and start to incur losses beyond the deposit margin or balance that falls below the required level, you may receive a margin call, and additional funds will need to be added to your account . The top-up amount is known as the maintenance margin, and failure to meet the required amount may result in immediate closure of your position, with the total loss incurred be realised and deducted from your account.

However, you should be reminded that spread betting is a leveraged product and can result in losses greater than your initial deposit (i.e. the margin). It may not be suitable for all investors.

Before starting Spread Betting, besides considering your own financial situations and risk appetite, it’s important to know the three main features involved: the spread, the bet size and the bet duration.

What is the spread in Spread Betting?

The spread is the difference in the price at which the broker sells you the asset, and the price at which the asset is bought from you. These prices are also known as Bid and Ask, and it’s important to understand that the spread is wrapped around market prices, so you are speculating on the price movement of an asset — you do not actually own the underlying asset. This means that you’ll always buy at slightly higher prices than the market, and sell at slightly lower prices than the market.

For example:

• The S&P 500 is reading at 5,667.5
• The buying price is 5,668 and the selling price is 5,667
• The spread is 5,668 minus 5,667 = 1 point

Clearly, the spread impacts the overall returns of your trade. It is crucial to choose a broker that charges a fair spread, so as to keep your trading costs low.

What is the bet size?

Bet size refers to the amount you want to bet per unit of movement in the underlying asset or market you want to trade. Bet sizes can be chosen by the trader, but are subject to a minimum requirement. This minimum requirement may vary according to asset type, and will be made known to you when placing your trade.

Here’s how bet sizes work. Units of movements in markets are measures in points.

• If you place a bet size of $50, and the market moves in your favour by 10 points, you will make a profit of 10 x $50 = $500.
• If the market moves against you by 12 points, you will make a loss of 12 x $50 = $600.

As Spread Betting is a leveraged product, both profits and losses can be magnified, and losses can exceed your initial deposits. Therefore, it is important to size your bet carefully, based on your trading budget and risk management plan.

What is the bet duration?

Spread Bets last for a fixed duration, upon which the trade is closed. You may also close the trade at any point during the bet duration manually before expiry.

Bet durations can last anywhere from a day to several weeks or months. Two commonly offered Spread Bet durations are:

• Daily funded bet, which runs until you choose to close your trade. These are subject to overnight charge, and this type of bet may be more suited for short-term trades.
• Quarterly bet, which expires at the end of a stipulated quarterly period. Such spread bets may be rolled into the next quarter, making them suitable for longer-term strategies. However, doing so may involve additional charges, or other adjustments according to the market conditions then.

• Spread Betting offers trading opportunities in both market directions, short or long
• Use of leverage allows for a smaller capital to start trading. However, this also increases your risk, as losses can exceed your initial deposit
• Offers access to a wide variety of different assets and markets without taking direct ownership of the underlying assets
• Spread Betting is not subject to capital gains tax, allowing traders to enjoy tax-free profits (Tax treatment depends on your individual circumstances and may be subject to change.)
• May be used to hedge against short-term market downturns

Spread betting is a complex, leveraged product and it is not suitable for all investors. It carries a high level of risk to your capital as prices may move rapidly against you. You could lose more than your initial investment. In that case, you may be required to make further payments at a short notice. As these products may not be suitable for all clients, please understand the risks sufficiently before trading and seek independent advice, where necessary.