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5 Minute Guide To Spread Betting
Page Summary

Want to know what Spread Betting is - how it works - its advantages & disadvantages - and how to use it to trade the markets?

Then take 5 minutes to read this guide.

What is it
Spread Betting is a trading product used to speculate on the financial markets, including individual equities, stock indexes such as the FTSE 100 or Nasdaq, bonds, currencies and commodities.

It is also extremely flexible, enabling traders to profit from both up and down markets via short selling.

What differentiates spread betting from other types of financial products is that the profits are 100% Tax-Free.

How does it work
A spread bet broker will quote a two-way price and the customer will bet the market is going either up or down with an associated cost per point. For example -

A winning trade spread bet trade

  • The FTSE 100 market might be quoted at 4200 - 4202
  • You have the option of buying at 4202 (the offer price) or selling at 4200 (the bid price)
  • If you expect higher prices buy at 4202 perhaps risking £1 a point
  • Assume you're right, the market rallies and you sell out at 4222
  • 4222 - 4202 = 20 x £1 a point = Profit of £20

A losing trade

  • The FTSE 100 market is quoted at 4289 - 4291
  • You're expecting prices to rise and so buy at 4291 risking £1 a point
  • However, the market declines and you sell out at 4261
  • 4291 - 4261 = -30 x £1 a point = Loss of £30
A Short trade example
As indicated spread bets can be used to easily short the market, or profit from falling prices. If you're unsure what short selling is and how it works see this link.
  • The Gold market is $995 - $996
  • You expect prices to fall and so sell short £1 a point at $995
  • Gold falls and to take your profit you buy the short trade back at $961
  • 995 - 961 = 34 x £1 a point = Profit of £34
Note, that although Gold is quoted in dollars the trade was done in pounds which means there's no currency risk and no need for a fiddly currency conversion.
Important - Spread Bet profits are open ended and so are losses
If you place a £10 bet at 10-1 with a High Street bookie you obviously know in advance the maximum potential profit (£100) and loss (£10).

But with spread betting both the profit and loss are open-ended, and this is important to understand especially when it comes to potential losses. For example, buy £1 of the FTSE at 4200 and if the trade is held for a long time it's possible for the market to drop 500 points, maybe even 1,000, translating into a £500 - £1000 loss.

Of course, any trader is unlikely to run such a loss so this example was used to highlight the potential of open-ended losses.

So how to control the risk when spread betting? Use a stop loss as discussed below.

Losses can be controlled via stop losses
A stop loss order is self explanatory, it stops losses. For example -
  • Buy the FTSE at 4200 risking £1 a point
  • Place a stop loss order at 4180
  • If the market moves below 4180 the position will be automatically sold for a loss

Note that a stop loss order is only activated should price move through a certain point, 4180 in this example. Therefore if the market were to trade down to 4181 before rebounding to 4200+ the stop order will not be executed.

Ultimately Stop losses are a good way to pre-define a loss when a trade is first initiated.

Most orders can be entered ahead of time
As indicated spread betting is very flexible meaning there are a myriad of different orders a client can use to fine tune his trading such as -
  • A market order - buys or sells the current price
  • A limit order - Sells above the market or buys below - for example if the FTSE is trading at 4200 you can enter a limit sell order at 4225 and if the market moves higher and through the order level it will get automatically executed
  • A market on close order - trades right on the close
  • More information on the different orders on this link

TIP - Get a thorough knowledge of the different order types

Unlike buying or selling stocks through a traditional stockbroker there are countless different order types and techniques with spread bets and these can seem complicated when first starting out.

It's therefore imperative to make sure you know what they all are, how to use them, and their advantages and disadvantages in different trading scenarios.

How much can you bet per point
In this guide I have used £1 a point in all the examples. £1 is usually the minimum trade amount but the maximum can be much larger, perhaps £1,000 or even £3,000 a point.

And this is what makes spread betting so interesting because you can make it as low risk (£1 a point) or as high risk as you or your account balance warrants.

What about the different trading months
If you study spread betting in more detail you'll often see there are a few different market quotes for the same product. For example a broker might offer the following markets on the FTSE 100 -
  • Daily market - for day trading
  • Weekly market - for positions of up to a week
  • Monthly market - for positions up to a month
  • Quarterly market - for positions of up to 2-3 months
  • Yearly market - for multi month positions

Which market to use for a particular trading idea can seem complex at first but it highlights the importance of properly researching the mechanics of spread betting before risking real money.

Try therefore to be different to many new clients who jump in at the deep end without sufficient knowledge as then it's odds-on that you'll generate losses.

Dealing is the same for all markets
With spread bets it doesn't matter which market you're trading, the buying, selling, profit and loss process is exactly the same. So trade Orange Juice, Glaxo shares, Gold or the FTSE 100 and your broker will -
  • Quote you a 2 way dealing price to go long or short, and
  • You have the choice of buying or selling with an associated pound per point
Commissions and other costs
No spread bet broker charges a commission or any other costs such as Stamp Duty.

However, the bid-offer spread (the difference between buying and selling) is theoretically a cost and must be noted.

Tight bid-offer spreads mean cheaper dealing costs so be on the lookout for them. Also realise that the more trading you do the more you'll pay away the bid-offer spread and this can start to get expensive.

Spread Betting advantages
  • Tax free profits - Who can argue with this point

  • No commissions or Stamp Duty - This is obviously good news but Spread Bet trading is not free as you'll have to pay the bid-offer spread

  • Trade with smaller amounts of money - The ability to trade with small positions is a massive advantage when learning the game as losses can be kept to a minimum

  • Instant access to all the markets - Spread Betting offers an incredibly wide range of different markets which can all be traded from the one account

  • The ability to easily go short - Flexible products are always the best

  • Good internet software - Collectively the spread betting firms have invested millions of pounds into software development and it shows, their online trading platforms are superb

  • Unique markets - Spread betting offer markets on property and Binary Bets which are similar to fixed odds bets - more information on Binary Bets

  • Ability to place stop losses - Helps reduce risk, and as potential spread betting losses are theoretically using a stop loss this is a sensible and prudent way to approach the game of speculation. See Secret 5 - Always use a Stop Loss - One day they'll save your (financial) life - which is one of our 10 Secrets to Successful Spread Betting.
  • Leverage - Leverage is like fire, your best friend but it can turn out to be a nasty enemy. Take on too much leverage and even small market moves can result in heavy losses

  • Tax-free - it's only an advantage when you win. When you lose losses can't be offset against Capital Gains Tax

  • Wide bid-offer spreads - The spread is where the spread bet brokers make their money. The bid-offer prices quoted are often wider than if trading the cash product. For example, British Land might be quoted at 460.5 - 461 on the London Stock Exchange but the spread bet market is 460.1 - 461.5. To the initiated that might not seem too much, but it is a big deal especially if short term trading

  • Credit offered - Depending on who you are and if you've got a good credit rating the spread betters can offer credit accounts. To some this might be an advantage but to others it will only cause problems. My advice is simple - deposit cash with a broker and forget about credit
Which broker(s) to use, and why
WARNING! - Spread Bet Broker Advice

There are good spread bet brokers and there are bad ones.

Having a good broker won't guarantee you profits but a bad broker will probably lead to losses as a combination of their gamesmanship and suspect software takes its financial toll.

So who do I recommend?

Simple, the 2 brokers I personally use for my own spread betting (and I've used them for years) -

LearnMoney.co.uk comment:
Spread betting is a great trading tool for those wanting to speculate on the financial markets as -
  • It's flexible
  • Relatively inexpensive to trade
  • A single account can be used to trade a myriad of different instruments
  • The online trading platforms are excellent, and
  • The profits are tax-free

But it's major downside is the leverage offered. Leverage itself is not so much of a problem if you control it, but let it get out of hand and it's very easy to lose a large sum in a short period of time.

For the new trader the best advice I can give is to make sure you fully understand what you're doing before you get heavily involved. Spread betting is not particularly sophisticated but there are enough subtitles and nuances to fox the beginner. Experience is therefore of critical importance.

So if you're interested in spread betting can I advise you download our free guide - How to learn spread betting and prosper.

FREE Report : How to Learn Spread Betting and Prosper
How to build the all-important trading experience
Where to get trading help and advice
Which broker to use and why
Simple 2 month training plan to follow
Download the FREE report
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