What is Spread Betting? How to Spread Bet in 2022

The investment arena is jam-packed with complex financial products and services.

One such example of this is spread betting. In a similar nature to CFDs, spread betting allows you to speculate on the future price of an asset without actually owning it. Instead, you are merely guessing whether the asset will go up or down in price.

However, it is crucial that you have a firm grasp of how spread betting works before parting with your money.

In our Ultimate Spread Betting Guide, we go over the basics of spread betting. This will include the ins and outs of how spread betting works, what you can trade, what risks you need to consider and more.

How does Spread Betting Work?

Spread betting is a form of trading that allows you to buy and sell a range of financial instruments without actually owning the asset.

Instead, you are simply speculating on whether the price of the asset will go up or down. For example, let’s say that you wanted to invest in oil. By doing this through a spread betting platform, you would not be required to own or store the asset.

You simply need to choose how much you want to invest and whether you believe the future price will go up or down. This is why people often think that spread betting and CFD (contract-for-difference) platforms are one of the same thing, as the investment process is very similar.

However, spread betting is different from other forms of trading due to the way that your stake is calculated. Let’s take a look at a quick example so that you can see how a spread betting trade would be structured.

Example of a Spread Betting Trade

i) Choosing a Trade

Let’s say that you want to speculate on the price of IBM stocks. After performing some analysis on the company, you feel that IBM is heavily undervalued. This means that you are going to place a ‘buy’ order, which means you believe the price will increase.

ii) Stake Per Point

The current ‘sell’ price is £250, and the ‘buy’ price is £252. This means that the ‘spread’ is 2 (the difference between £250 and £252). We’ll cover the spread in more detail further down. Moving on, you now need to think about how much you want to stake per ‘point’. In this example, each dollar that IBM moves in the market will represent 1 point. You decide to stake £10 per point.

iii) Calculating Your Gains/Losses

A few hours after placing your trade, IBM stocks are now valued at £262. This is great for your trade, as you purchased a buy order. As you opened the trade at £252, this represents a profit of 10 points. Your stake was £10 per point, so you made a total of £100.

What does Going Long and Short Mean in Spread Betting?

What is the Spread Bet Size?

If you were to place a bet at a trackside bookmaker, you would always know how much you were staking, and how much you stood to win. For example, if you staked £100 at 3/1, you would either collect £400 (£100 x 3/1) or lose your original £100 stake. However, spread betting works in a completely different way, as there is technically no limit to the amount you can make or lose.

In order to get your head around this, you need to have a firm understanding of the ‘point’ system. As I have loosely covered in some of my spread betting examples so far, you need to decide how much you want to stake per point. The point will vary depending on the type of asset you are trading. For example, trading stocks and shares might see the point set at every £1 movement of the underlying asset. If the asset increased by £7 in value, this would mean 7 points. If you were staking £20 per point, then your profit or loss would be £140 (7 points x £20 per point).

What is Leverage in Spread Betting?

When you trade at a spread betting platform, you will be taking on leverage. This is a popular instrument in the financial space as it allows you to trade more than you have in your account. For example, let’s say that you are looking to make a trade worth £10,000, but you do so with 1:10 leverage. This means that you would only need to deposit £1,000 in your account (£10,000 * 10%). This would also mean that your gains are amplified by a factor of 10.

However, applying leverage to your spread betting investments also comes with its risks. While you stand the chance of amplifying your gains by a factor of 10, your losses would also be amplified by the same figure. By applying leverage to your trades, you also need to consider the fees.

This is because you are effectively borrowing the money from the broker. For example, if your trade is worth £25,000 at a leverage of 1:10, but you only deposit £2,500, then the broker is lending you the remaining £22,500. This is known as financing, and it is charged as a percentage of the amount you borrow. The financing fee is charged for every day that you keep your leveraged trade open.

What Margin in Spread Betting?

Understanding how the margin works in spread betting is crucial.

Let’s say that you want to trade £20,000 worth of oil, and the margin requirement is 10%. This means that you can place your £20,000 trade by simply depositing £2,000. This gives you much greater exposure to your chosen marketplace. If your trade is successful, your gains are multiplied by a factor of 10. For example, if the price of oil went up by 5%, you would actually have made 50% because of the way the margin works.

However, if the price of oil went against you, then you could lose all of the margins that you put up.

Sticking with the same example as above, your margin on the trade is £2,500, which is 10% of the total order. If the price of oil went down by 10%, this would mean that your trade would be ‘liquidated’. This closes the trade automatically, and the margin would then be collected by the spread betting company.

What is the Spread?

The spread is the difference between the ‘buy’ and ‘sell’ price offered by the spread betting platform.

The percentage difference between the two numbers is how spread betting firms make a profit. For example, let’s say that the ‘sell’ price on Facebook stocks is £100, and the ‘buy’ price is £102. This means that for every £100 staked, the platform would make 2%, or £2.

The size of the spread can have a direct impact on the amount you are able to make from your spread betting trade.

Sticking with the same example as above, you would need to make a profit of at least 2% just to break even. As such, you should assess the average spread charged by a spread betting firm before signing up.

What is the Spread Bet Duration?

Unless you are trading a specific time-sensitive financial asset (such as futures or options), then you can keep your trade open for as long as you like.

However, you do need to make some considerations regarding the costs of financing. As I briefly noted earlier, you will need to pay financing costs when you apply leverage to trade.

As virtually all spread betting trades are based on leverage, these costs cannot be avoided. You will be charged a financing fee for each day that you keep your trade open. The platform should let you know what this amounts to when you set up your trade.

What are the Origins of Spread Betting UK?

Spread betting first grew its roots in 1940s Chicago. It is believed that the concept was developed by a mathematics teacher and soon-to-be bookmaker.

However, spread betting as we know it today is still a relatively new phenomenon. Platforms were originally limited to institutional investors, and the number of tradable asset classes was limited.

When the first regulated spread betting platform reached the UK in the 1970s, investors could only invest in gold. Fast forward to 2021 and everyday investors can now access thousands of financial instruments at the click of a button from a mobile or desktop device.

How is Spread Betting Taxed in the UK?

Although this will depend on where you are a tax resident, spread betting is often classed as gambling. As most jurisdictions do not charge tax on gambling winnings, your spread betting profits could be tax-free. Gains made on the stock markets will always be taxed via capital gains.

Spread Betting versus Stocks, what’s the difference?

What are the Risks of Spread Betting?

Regardless of what asset class you are investing in, there will always be the risk that you can lose money.

This is no different from the spread betting industry. Your potential losses will come on two main fronts. Firstly, if the price of the asset you have traded goes against you, you’ll lose money.

For example, if you go long on oil, but the price of oil goes down, then you will have made a loss. These losses will only be realized once your trade has been closed.

The biggest risk that you need to consider is that of liquidation. This is because you will be required to cover the margin on your spread betting trades, which is based on the amount of leverage you obtain. For example, the broker might ask you to deposit 5% of the total amount you wish to trade. If the asset then went down by 5%, and you didn’t add more funds to your account to cover the margin, your trade would be closed automatically.

Managing the Risks of Spread Betting

Conclusion – how to spread bet online

If you have read my guide on spread betting from start to finish, then you should now have a good understanding of how the industry works.

As you now know, traders are fond of spread betting platforms because of the ease at which they can access the financial markets. Whether it’s currencies, stocks, and shares, futures, indices, or commodities – spread betting allows you to speculate on assets in a matter of seconds. Spread betting also enables you to wager more than you have in your account via leverage.

However, you should also have a firm grasp of the risks of spread betting. As I have outlined in my guide, you should install a range of safeguards on your trades.

This should include stop-loss orders at a minimum, as well as ‘guaranteed’ stop-loss orders to cover market gapping. Just make sure you are fully prepared for the risks of spread betting before you take the plunge.