Spread betting is appealing to many people, as it is easy to understand and offers you the possibility to multiply your money when you correctly predict an outcome. It is truly betting, and you can even spread bet on sporting events, even though it is frequently based on the financial markets, the context that we consider here. Having said that, it is regulated by the Financial Services Authority (FSA) rather than the Gambling Commission.
The way spread betting works is simple. You can take a bet on the movement of a price (or a score for the sporting version), and if you are right you profit. Unlike regular betting, you do not have fixed odds set by the bookmaker and just win or lose, but you are paid according to how far the price moves.
You bet a certain amount for each point that the price moves, and this determines how much you win. If you lose, you have to pay the same amount per point out to the bookmaker, so there is the possibility of losing quickly too. The name spread betting comes from the spread, which is where the bookmaker earns his income. The spread is the difference between the price you can buy at and the price you can sell at, and is best explained with an example.
Dow Jones Spread Bet Example
Suppose you wanted to spread bet on the Dow Jones Industrial Average (DJIA). You might be quoted 10,500/10,530 by your dealer. This means that you can buy, which is essentially taking a long position, at 10,530. If you thought that the Dow was going down, and wanted a short position, you could take that at 10,500. The actual DJIA is somewhere between these two numbers. You can name your stake, which might be £1 per point.
If the Dow goes up 100, to 10,600/10,630, and you have a long position which you took at 10,530, you could sell at 10,600 for a 70 point gain, which would give you £70 profit. If you had taken a short position, however, you would lose 130 points, from 10,500 to 10,630, and have to pay the bookmaker £130. The spread ensures that the winners get less than the losers lose, and that’s how the bookies stay in business. When you choose where to bet, you need to examine the spreads offered and choose the lowest ones.
FTSE 100 Spread Bet Example
Suppose the FTSE 100 cash index is currently trading at 5000.5, the quote for the FTSE 100 index could be, say, 5000.0-5001.0 and you are of the opinion that the FTSE 100 will continue rising in value, therefore you buy for £2 per point at 5001.0. A few hours later, the FTSE 100 index has risen to 5021.5 and the spread betting quote is now 5021.0-5022.0. You decide to close your trade and to do this you sell £2 at 5021.0, giving you a net profit of £40 (this is the number of points between your opening and closing level, multiplied by your stake).
However, if you had sold the spread betting provider’s quote at 5000.0 for £2 per point in the anticipation of the FTSE 100 falling in value and subsequently closed at the new price of 5022.0, you would have lost £44.
Do realise that you can make quick gains spread betting but you can also accumulate substantial losses quickly if you aren’t careful. As a result, you need to have money in your account before you can open a trade. This money is referred to as margin, and each market has a different margin requirement.
To make money spread betting, you should approach it as a business and study trading in the market you want to bet on. You have a choice of most financial markets, including currencies and commodities, and you should pick one that you know about or want to learn about. You must learn good trading principles, otherwise your bet will just be a gamble. In particular, you need to minimize your losses by exiting bets quickly if they turn against you, as the losses can mount up quickly.
Finally, when you make profits from spread betting the good news is that, in the UK at least, you do not need to pay capital gains tax on them. The government regards your winnings as a prize, and not as the profit from an investment.