Spread Betting

Spread betting is a derivative strategy, where participants do not own the underlying asset they bet on, such as a stock or commodity. Instead, they speculate on whether the price of the asset will rise or fall. The payoff is based on the accuracy of the wager rather than the actual price movement of the asset.

How Spread Betting Works

When engaging in spread betting, an investor places a bet on whether the price of an underlying asset will be above or below a specified level (the “spread”) at some point in the future. The bet is on the “spread” between the buy (ask) and sell (bid) prices quoted by a broker. If the trader believes the asset’s price will be higher than the spread, they “buy” (go long). If they believe the price will be lower, they “sell” (go short).

The profit or loss in spread betting is determined by the difference between the asset’s price at the time the bet is closed and the spread. If the speculation is correct, the trader gains a profit proportional to the amount by which the asset’s price exceeds the spread. If the bet is incorrect, the trader incurs a loss.

Example of Spread Betting

Imagine a trader decides to place a spread bet on the price of gold. The broker quotes a spread of $1,850 - $1,870 for the price of gold:

If the trader believes the price of gold will rise above $1,870, they will buy at $1,870. Conversely, if they think the price will fall below $1,850, they will sell at $1,850.

\[[Profit](../p/profit.html) = (Closing Price - Spread) × Stake = (1,900 - 1,870) × Stake = 30 × Stake\] \[Loss = (Spread - Closing Price) × Stake = (1,870 - 1,800) × Stake = 70 × Stake\]

Key Features of Spread Betting

Leverage

Spread betting is often leveraged, meaning traders can bet more than their initial margin deposit. Leverage allows for larger positions and potentially higher profits, but also increases the risk of significant losses.

Tax Efficiency

In the UK and some other countries, spread betting gains are typically exempt from capital gains tax and stamp duty. However, tax laws can change and may vary by jurisdiction, so traders should consult a tax professional.

Wide Market Access

Spread betting platforms offer access to a wide range of markets, including equities, indices, commodities, currencies, and more. This allows traders to diversify and leverage opportunities across different asset classes.

No Ownership of Underlying Asset

Traders do not own the underlying asset in spread betting, only the contract specifying the bet. This means there are no costs or complexities associated with holding the actual asset, such as logistics or storage for commodities.

Costs and Risks

Bid-Ask Spread

The primary cost of spread betting stems from the bid-ask spread. The broker sets a wider spread than the market to incorporate its profit. The spread can vary based on market conditions and the broker’s policies.

Risk of Losses

Due to leverage, traders can lose more money than their initial investment. Effective risk management strategies, such as using stop-loss orders, are crucial to minimize potential losses.

Advanced Strategies in Spread Betting

Hedging

Traders can use spread betting for hedging purposes, especially in volatile markets. For instance, an investor holding a portfolio of stocks can place a spread bet against a falling market to offset potential losses in the portfolio.

Pair Trading

This strategy involves simultaneously betting on the spread between two correlated assets. Traders buy (bet) on the asset expected to outperform and sell (short) the underperforming asset. The goal is to profit from the relative movement between the two assets, regardless of the overall market direction.

Trend Following

Trend following is a strategy where traders identify and bet according to the prevailing market trend. By using technical indicators, such as moving averages, traders aim to capitalize on the momentum of asset price movements.

Scalping

Scalping is a high-frequency trading strategy where traders make numerous small bets on short-term price movements. This requires quick decision-making and minimal transaction costs to be effective.

IG Group

IG Group is one of the largest and most established providers of spread betting services. Founded in 1974, IG offers a wide range of markets, competitive spreads, and advanced trading tools.

CMC Markets

CMC Markets provides a comprehensive spread betting platform with access to thousands of markets, including indices, forex, commodities, and stocks. Established in 1989, CMC Markets is known for its robust trading interface and customer support.

Spreadex

Spreadex is a UK-based platform offering financial spread betting along with sports betting. They provide a diverse range of markets and competitive spreads, catering to both novice and experienced traders.

City Index

City Index has been providing spread betting services since 1983. The platform offers access to numerous financial markets, educational resources, and strong customer support, making it suitable for traders of all levels.

ETX Capital

ETX Capital offers a wide range of spread betting options with competitive spreads and leverage. The platform offers advanced charting tools, risk management features, and educational resources for traders.

Conclusion

Spread betting provides traders with a flexible and tax-efficient means to speculate on financial markets without owning the underlying assets. The ability to go long or short, leverage positions, and access a wide range of markets makes spread betting an attractive option for both amateur and seasoned traders. However, the risks associated with leveraged trading underscore the importance of careful strategy, risk management, and the use of stop-loss orders. As the landscape of financial markets continues to evolve, spread betting remains a versatile and dynamic tool for traders seeking to capitalize on market fluctuations.