What is spread betting & how does it work?

Spread betting provides a route into multiple markets. This guide offers information to help build your strategy. We explain how spread betting works, and we expand on the potential benefits and risks involved. This is spread betting explained.

Spread betting explained: What to expect from this guide

• What is spread betting?
• How does spread betting work?
• How is margin calculated in spread betting?
• Can you spread bet without leverage?
• What's the difference between spread betting and CFD trading?
• How long can you keep a spread bet open?
• What are the benefits of spread betting?
• What are the risks of spread betting?
• In which markets can you trade via spread betting?
• What are some spread betting strategies?
• Can you gain profits from spread betting?
• Is spread betting taxable?
• What are the costs associated with spread betting?
• How to spread bet, and build your knowledge with Tradu

What is spread betting?

Spread betting is a derivative, which means that, when you execute a trade, you don't take ownership of the underlying asset. Instead, you only speculate on the future performance of that asset. This can be done in either direction by going long or short. Spread bets are placed using leverage.

Trading via leverage enables you to open a position while only committing a percentage of the required capital, known as margin. The upside of this mechanism is that you can maximise your profits for a relatively small outlay. However, the risk is that you are still exposed to the full value of the position, and not just the amount you deposit. We'll cover all the potential pros and cons later in this guide. But before we do, let's look at how spread betting works.

How does spread betting work?

If you speculate that the value of an asset is about to increase, you go long. If you speculate that its value is set to fall, you go short. With spread betting, you speculate per point of price movement. If your prediction proves correct, you make a profit on the trade. Let's use the share price of 'Company XYZ' to provide a theoretical example:

• Company XYZ has a buy price of 125.00 per share
• You speculate that its share price is going to go up, so you want to open a long position.
• You would like to trade at £20 per point of movement, where a point is defined as the last digit before the decimal place, so your total exposure to open the position is £2,500 (125 x £20).
• Let's say your broker requires a margin of 20%, so your initial outlay is £500.
• As you predicted, the share value of Company XYZ does rise to a point where its sell price is 140.00
• At that stage, you decide to close your position and sell. The 15 point increase equates to a profit of £300

The above is an example of how spread betting works when the outcome is in your favour. Now let's break down what happens if the markets don't shift as you anticipated.

• Rather than rise to 140.00, the value of Company XYZ falls to a sell price of 100.00.
• You decide to close the position to guard against any further losses, in case the value continues to drop.
• The price has moved 25 points against you (from 125 to 100), which means you have lost £500 on the trade.

What is the spread in spread betting?

The spread is the difference between the buy price (sometimes referred to as the offer) and the sell price (sometimes referred to as the bid). These fall on either side of the asset's underlying market value, so you typically buy at slightly higher than that value, and sell at slightly lower. To illustrate this point further, let's continue to use Company XYZ as an example:

• Let's say the market value of Company XYZ is 150.00
• Its buy price is 150.20,
• Its sell price is 149.80
• Therefore, the spread is 0.4 points.

How is margin calculated in spread betting?

Your margin requirements will vary depending on your broker and the market you wish to trade. In the example of Company XYZ quoted above, the margin required for spread betting on shares was 20%, but this won't always be the case, and the margin for different trades may be as low as 3.33%. You must understand the various rates before you open any position, and you must also be aware that there are two types of margin.

• Your initial margin is the capital you have available in the account to open the position.
• Your maintenance margin is the capital you need to keep the positions open, in case the equity on your account drops below the maintenance margin, your position may be liquidated

Can you spread bet without leverage?

No. Leverage is a fundamental part of the spread betting mechanism. If you wish to trade without leverage, you may want to look into investing. Unlike spread betting, you will have to commit 100% of the capital to execute any trade. It also means taking ownership of the underlying asset.

What's the difference between spread betting and CFD trading?

Like spread bets, contracts for difference (CFDs) are a derivative product. And like spread bets, they also use leverage. But unlike spread betting, CFD trading does not involve speculating per point of price movement. Instead, a buyer and a seller enter an agreement where the former agrees to pay the latter the difference in an asset's value, between the time at which the contract opens, and when it closes.

Read more in our comprehensive guide to CFDs and on the difference between spread betting and CFD trading.

How long can you keep a spread bet open?

The answer to this depends on the type of asset you trade. Most Spread Bets can be held indefinitely however there are some instruments that have expiry dates. It is important to bear in mind that some brokers charge a fee for holding a position overnight, while they may decide to close your position if your maintenance margin does not cover the losses incurred on a trade.

What are the benefits of spread betting?

Spread betting offers a number of advantages, which is why it has become a popular instrument among traders worldwide. The benefits include:

• Being able to trade in either direction. You can make profitable trades in both bullish or bearish markets, as long as your prediction proves correct. This may also help you hedge against other positions, and reduce your risk.
• Trading on leverage. This means you can open large positions while committing only a percentage of the capital upfront.
• Gaining access to a wide range of markets. You can trade forex, shares, indices, and commodities through your spread betting account.
• Benefiting from tax breaks. The rules vary from country to country, but profits you make from spread betting are tax-free in the UK, for example.
• Not taking ownership of the underlying asset. As a derivative product, spread betting means you simply speculate on the future performance of an asset.

What are the risks of spread betting?

Of course, there are no guarantees when it comes to spread betting – or any other form of trading. Before you open an account, and start opening positions, you must understand the risks. These include:

• The possibility of amplifying your losses. This is the flip side of trading on leverage: You are still exposed to the full value of the position, so if the market moves against you, then you will owe the full amount plus your losses – not just the capital you commit as a deposit.
• The volatile nature of the markets. This is a risk across all forms of trading, and volatility may work in your favour. But the unpredictable nature of some asset classes can soon turn a profitable trade into a losing one, so you must conduct thorough research, and monitor your positions as closely as possible.
• Harder to offset losses. In countries like the UK, profits from spread betting are tax-free. This is an obvious advantage, but it also means that there is no way to offset losses – unlike with CFDs, where capital gains tax may be charged.

In which markets can you trade with spread betting?

One of the benefits of spread betting is the variety of asset classes for which it applies. Diversifying your portfolio across different asset classes may be an effective strategy for managing risk. You may trade markets including but not limited to:

• Forex
• Shares
• Indices
• Commodities

The spreads, margin requirements, and commission fees are likely to vary between markets. Make sure you're fully aware of these considerations before you start executing any trades.

What are some examples of spread betting strategies?

There are different approaches to develop your portfolio. The choices you make depend on your level of experience, your schedule, and your trading objectives. Common strategies include:

• Day trading: Opening and closing positions within the same day.
• Trend trading: Looking at past performance to identify potential future movements.
• Swing trading: Identifying when an asset's value is set to buck the prevailing trend, and begin to move in the other direction.
• Range trading: Spotting instances where an asset's value tends to remain within a certain range, and trading within that.
• Breakout trading: Identifying where an asset's value could defy those upper or lower limits, and 'break out' of the range.

Find out more in our guide to trading strategies.

Can you gain profits from spread betting?

If your prediction proves accurate, and an asset's value goes up or down as you expected it to, you make a profit from spread betting. And in some countries – such as the UK – those profits are tax-free. By trading on leverage, you can open a position while only committing a proportion of the capital, so profits are amplified.

However, it is crucial to remember that trading with leverage means that you are exposed to the full position. So, if the market moves against you, your losses will be amplified too.

Is spread betting taxable?

The answer to this varies from country to country. In the UK, for example, profits from spread betting are tax-free. You do not own the underlying asset, so there is no stamp duty to pay, and there is no capital gains tax either.  Please seek individual and independent tax advice from a financial advisor, auditor or legal counsel with respect to the tax implications.

What are the costs associated with spread betting?

Your broker sets a spread, meaning the buy price/offer is slightly above the market value, and the sell price/bid is slightly below. The spread is factored into the overall cost. There may also be commission fees to pay, which are added to your losses, or deducted from your profits. There may be other charges too – for example, for maintaining a position overnight.

How to spread bet, and build your knowledge with Tradu

Our proprietary platform enables you to spread bet on multiple markets.

The first step is to open your account, and explore our range of comprehensive analytical tools that help shape your strategy.
Once you've decided on the asset you want to trade, and in which direction, you can open a position of your chosen value.
If your prediction proves correct, you'll stand to make a profit, and you may wish to set up a stop-loss order to reduce your risk in the event of the market moving against you.

Ready to get started?
Open a spread betting account with Tradu

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