What Is Spread Betting?
Let me explain spread betting directly: it's about speculating on the direction of a financial market without owning the underlying security. You place a bet on the price movement of a security. A spread betting company quotes two prices—the bid and the ask, which form the spread—and you bet whether the price will end up lower than the bid or higher than the ask.
In spread betting, you don't own the underlying security; you're just speculating on its price movement. Don't mix this up with spread trading, where you take offsetting positions in different securities to profit from changes in their price differences.
Key Takeaways
To sum it up quickly, spread betting means speculating on financial market directions without holding the underlying security. You speculate on price movements using leverage, without owning the asset. It's often promoted as a cost-effective way to bet in both rising and falling markets.
Understanding Spread Betting
Spread betting allows you to speculate on price movements in instruments like stocks, forex, commodities, currencies, cryptocurrencies, and fixed-income securities. You make a bet based on whether you think the market will rise or fall from the time your bet is placed, and you choose how much to risk.
It's marketed as a tax-free, commission-free way to profit in bull or bear markets. As a leveraged product, you only deposit a small percentage of the position's value—for instance, if a position is worth $50,000 with a 10% margin, you put down $5,000. This leverage boosts both gains and losses, so you could lose more than your initial deposit.
Important Note on Availability
Keep in mind that spread betting isn't available to US residents because of regulatory and legal restrictions.
Managing Risk in Spread Betting
High leverage brings risks, but spread betting provides tools to limit losses. You can use standard stop-loss orders, which automatically close a losing trade when the market hits a set price, though in volatile conditions, it might close at a worse price. Guaranteed stop-loss orders ensure closure at your exact set value, no matter the market, but they come with an extra fee from your broker.
You can also mitigate risk through arbitrage by betting both ways at once.
Spread Betting Example
Here's a straightforward example: suppose ABC stock is at $201.50, and a spread betting company quotes bid/ask at $200/$203. If you're bearish and think it'll drop below $200, you sell at $200, betting $20 per point it falls below that. If it drops to $185/$188, you close with a profit of ($200 - $188) * $20 = $240. If it rises to $212/$215, closing means a loss of ($200 - $215) * $20 = -$300.
The firm requires a 20% margin, so for the position value of ($20 x $200 = $4,000), you deposit ($4,000 * 20% = $800) to cover the bet.
Spread Betting Benefits
You can bet on both rising and falling prices—long or short. Shorting physical shares requires borrowing, which is cumbersome, but spread betting makes shorting as simple as buying.
There are no commissions; companies profit from the spread, so you can easily track costs and size positions.
In some jurisdictions, it's treated as gambling, so gains might be taxed as winnings rather than capital gains or income—check with an accountant and keep records. Depending on your location, this can make it tax-efficient, especially where winnings taxes are lower.
Limitations of Spread Betting
If you don't grasp leverage, you might take oversized positions, leading to margin calls. Stick to risking no more than 2% of your capital per trade and know your position value.
In volatile times, firms widen spreads, which can trigger stops and raise costs. Avoid orders right before earnings or economic reports.
Spread Betting vs. CFDs
Many platforms offer CFDs alongside spread betting; both let you bet on price moves without owning assets. CFDs are contracts between you and the broker, exchanging the difference in price from open to close, with no physical delivery.
CFDs trade like securities without expiration, but require upfront commissions. Spread bets have fixed expirations and no fees—profits are basis point changes times your bet amount. Both pay dividends on long positions, but CFD profits face capital gains tax, while spread bets are often tax-free.
Frequently Asked Questions
What is financial spread betting? It's betting on price changes in securities, indexes, or assets without owning them.
Is spread betting gambling? It can be speculative with leverage, but also used for hedging or directional trades—some call it spread trading. Regulatorily, it's often seen as gambling since no actual position is taken.
Is it legal in the US? Most US brokers don't offer it due to potential illegality or heavy scrutiny in many states, making it mainly a non-US activity.
The Bottom Line
In essence, spread betting is speculating on market directions without owning securities—you bet on whether the price will beat the ask or fall below the bid, based on the quoted spread.
Other articles for you
A demand draft is a secure, prepaid bank instrument for transferring funds without the risks associated with personal checks.
A cash balance pension plan is a defined-benefit retirement plan where employers credit employee accounts with a percentage of salary plus interest, bearing all investment risks.
A kamikaze defense is a desperate corporate strategy where management damages the company to deter a hostile takeover.
Business ethics are moral principles guiding companies beyond legal requirements to build trust, integrity, and long-term success.
The Nasdaq 100 Index tracks the 100 largest nonfinancial companies on the Nasdaq exchange using a modified market cap weighting for balanced exposure across sectors.
Portfolio variance measures the overall risk of an investment portfolio by considering the fluctuations and correlations of its individual assets.
A qualifying event is a life change that lets you adjust or enroll in health insurance outside of standard open enrollment periods.
QDII allows qualified Chinese institutional investors to invest in foreign securities.
A viatical settlement allows terminally ill individuals to sell their life insurance policies for immediate cash, transferring benefits to investors who assume premium payments and collect upon death.
Grexit refers to Greece's potential exit from the Eurozone to return to the Drachma amid its debt crisis, though it has remained in the Eurozone with bailouts and austerity.