What is Spread Betting?

By January 7, 2015 Trading Academy

Financial spread betting is one of many forms of investing and betting FX markets, regulated by the UK’s Financial Conduct Authority (FCA).

You can use any of our trading platforms with a spread betting account.

With spread betting, you can choose to bet that the market will rise, or alternatively, you can bet that it will fall. If you are correct and the market moves in your favour, you will make a profit of your stake multiplied by each point that the market moves in your favour. If you are wrong you will make a loss of your stake multiplied by each point that the market moves against you. Via your account you have the ability to back your judgment as to whether any of our markets will rise or fall in value, similar to buying a share via a traditional stock broker in the hope that it will rise in value, so that you can sell it for a profit at a later date.

With financial spread betting you do not actually own the underlying asset that you are betting because it is a derived instrument. The prices that we provide you are derived from the underlying asset and these prices move in conjunction with that underlying asset.

How Does it Work?

When you spread bet, you do not buy or sell any currency but instead you make a bet as to which way you think the market or price will move. You can bet per penny or point movement – the amount you wish to bet is known as the “stake”, and can be as little as £1/€1/$1 per point or penny movement.

This diagram shows how your profit is calculated depending on whether you buy or sell the market, assuming your stake is £1:
sb_quotes

You can then bet £1/ $1 / €1 per point on the movement of FX prices that we quote.

For this reason you must be aware that your losses can increase dramatically if the markets move substantially in the opposite direction to your trade. All spread betting profits are recognised as the winnings of a bet.

The “spread” in the phrase spread betting refers to the Sell (Bid) and Buy (Offer or Ask) price quoted by a spread betting company. A spread bet price always has two parts. The first is the BID or price you can sell at. The second is the ASK or the price you can buy at. This price is calculated by adding additional points around the live (or the estimated future) market price of a financial product. For example, if the EURUSD is betting at 1.2000 our quote might be 1.2000-1.2001

One of the problems for spread betting companies is the word ‘betting’ as this gives a false impression to the marketplace. Spread betting is in fact a highly adaptable betting tool. One of the main benefits of spread betting is that all profits are recognised as the winnings of a bet , and are therefore free of Capital Gains Tax † in the UK. Tax law can differ depending on jurisdiction.

Spread Betting compared to Stocks

Traditional Stock Broker

ROCE working: 4750 ÷ 14000 x 100%
Buy 10,000 shares @ 140p
Cash outlay (£14,000)
Sell 10,000 shares @ 200p
Gross profit £6,000
Stamp duty (£70)
Commission (buy/sell) (£100)
Tax @ 18% (£1,080)
Overnight financing £0
Net Profit £4,750
Return on Capital Employed 34%

Price Markets

ROCE working: 5890 ÷ 1401 x 100%
Buy £100 per point @ 140.1p
Cash outlay* (£1,401)
Sell £100 per point @ 199.9p
Gross profit £5,980
Stamp duty £0
Commission (buy/sell) £0
Tax** £0
Overnight financing (£90)
Net Profit £5,890
Return on Capital Employed 420%


† Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

Remember that the risk is still the same for either scenario.

As with all spread bets you do not own or owe the underlying asset. So, if you open a buy spread bet on a share you will not have any voting rights.

Leave a Reply

Trade

CFD Trading involves significant risk.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
64.4% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
Professional clients can lose more than they deposit. CFD trading involves significant risk.
Read full Risk Warning Notice.

Price Markets UK Ltd (Price Markets) is a company registered in England and Wales under registered number: 09597543.
Price Markets is authorised and regulated by the Financial Conduct Authority (FCA) under firm reference number: 725804.

Office: 60 Gresham Street, London EC2V 7BB, United Kingdom.
Registered address: 35 Ballards Lane, London N3 1XW, United Kingdom.