Spreadbetting has become very popular in many countries including the United Kingdom in recent years. Financial spreadbetting is a way of profiting from the financial markets, similar to trading, but with more flexibility and providing a great deal of leverage or gearing for your money.
Spreadbetting is said to have begun in the UK in the 1980s, and was first involved with sports betting. Unlike, for example, horseracing, spread betting is not concerned with picking a winner with an all or nothing bet. Instead, the reward or loss from spread betting comes from a range of outcomes, such as the scores in a cricket match. Depending what the score is, you can win or lose a lot more than the original amount you wagered.
In sports spreadbetting, instead of betting if one team or another will win with an all or nothing pay out, spread betting will allow you to bet on the outcome and the number of points by which the superior team will prevail. This moves the bet to a position where gamblers are equally likely to take either side of the bet, and make or lose money by how far the score is from their wager.
When it is applied to the financial markets, spread betting allows the participants to profit or lose by how much the underlying financial instrument changes value. Because the market participant never takes ownership of any financial securities or other tradable item, spreadbets can be placed on a wide range of financial outcomes.
For instance, financial spreadbets are widely available on individual stock prices, on market indices, on commodities, on currency exchange rates (Forex), and many other generally traded items. It is up to the spread betting provider which and how many of these markets they make available to you, so when you start to spread bet you will need to research the market place of brokers to find one which deals in the financial securities that you want to bet on.
In the stock market when you wish to deal in traditional shares you go to a stock broker and he will quote you two prices. The lower of the two prices, which is the one you will get if you are selling shares, is referred to as the bid price. The higher quoted price is what you will have to pay if you are buying shares, and is the offer price. The difference between the two prices is called the ‘Spread’.
In spread betting the principle is practically the same, two quoted prices, bid and offer. You can either ‘buy’ at the higher price or ‘sell’ at the lower offer
In fact when you start to spreadbet, you will see there are two prices quoted for each financial security. The difference between these two prices is called the spread, and this is how the spread betting broker makes his commission. You can “buy”, that is go long looking for an increase in price, at the higher number, and you “sell” at the lower number. As you can buy or sell equally easily it is genuinely as easy to profit from a fall in value as it is to make money from increasing prices.
In effect, spreadbetting is very similar to trading in financial derivatives, and you can multiply the value of your money in a similar way. Of course, leverage applies both ways and you can also lose quickly a lot more than you have wagered, so it is important that you learn about spreadbetting and techniques to use it to make money. The best part is that winnings from a bet are not subject to capital gains tax in the UK, so spread betting is basically tax-free.
If you are interested in learning more about this form of trading, most providers brokers nowadays offer free trading spread betting seminars and webinars covering such topics as the basics of spread trading and CFDs to technical analysis and other more advanced areas.