Spread Betting - The basics

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

Spread Betting is flexible

Some of the attractions of spread betting, apart from the tax-free element are -

• All markets can be traded through the one account
• You can short sell, ie profit from declining prices
• Many markets are quoted 24 hours a day, especially the larger ones such as stock indexes and foreign exchange
• And smaller positions can be traded. For example, the minimum point size on the FTSE 100 future is £10 whereas it's £1-£2 via spread betting which is a massive bonus to the many traders with smaller accounts, especially those starting out

Spread Betting differs from the fixed odds betting offered by the Bookmakers. For example -

• A bookie such as William Hill may offer you 10-1 on a certain horse
• If you place a winning bet of £10 you'll receive £100 profit (plus your original stake)
• If the bet loses then all you will have lost is the £10 stake

But with spread bets you are not offered odds such as 2-1 or 12-1, instead you bet a stake, usually Pounds per point, on the direction of the market in question.

For example -

An example of a losing trade

Spread betting enables you to profit from falling prices (short selling)

• For a far more in depth guide to short selling see this LearnMoney.co.uk guide

By using spread bets a trader can also bet on a falling prices, this is called short selling. For example -

An example of a losing short trade

If you are struggling with what short selling is and how it works a fuller explanation is on the detailed LearnMoney.co.uk guide to short selling.

The 'Spread' of Spread Betting

Spread Betting companies don't charge commissions but they are not a charity. Instead they make their profit by charging a spread - the different price for both buying and selling.

Many industries also make their money by charging a spread, for example the second-hand car business. If you want to sell your car, you take it down the local garage and agree a price of £4,000. The garage owner will clean it up, fix anything that's wrong and then place it on his forecourt for sale at say £5,000.

In effect, you have sold your car at the bid price.

A week later somebody walks past the garage sees the car for sale and pays £5,000. He has now paid the offer price. And the garage owner has made a £1,000 profit minus costs.

A spread bet broker acts in a similar fashion -

The bid-offer spread - it's used for buying and short selling

It is important to note the bid-offer spread is not just used for buying the market and then selling for either a profit or loss. It's also used for short selling, or profiteering from lower prices.

Depending on whether you're buying the market to go long (expecting higher prices) or selling the market to go short (expecting lower prices) the bid-offer spread works in reverse.

If going long

• The word long means you have a position that will make a profit if the market moves higher
• If going long you will buy at the offer price
• When you want to liquidate the trade, whether at a profit or loss, you'd sell at the bid price

If going short

• The word short means you have a position that will make a profit if the market moves lower
• When shorting you would sell to open the position at the bid price
• When you wanted to liquidate the trade, whether at a profit or loss, you'd buy the short position back at the offer price

	Long Trade	Short Trade
Bid price	Sell to either take a profit or loss	Sell to establish a short position
Offer price	Buy to establish a long position	Buy to either take a profit or loss

Different months and different timescale bets

Spread bets allow you to speculate on different markets, perhaps the FTSE 100 index or Gold. However it is important to understand that you are not actually buying the FTSE or selling Gold. Rather you are buying or selling an instrument that will track the price of FTSE or Gold.

Spread betting will normally offer 2 different styles of bets on the same product, for example -

• The FTSE 100 rolling cash bet
• The FTSE quarterly bet

Both will move in a similar fashion but they are designed for different trading purposes. As a rule of thumb -

• A Daily Cash bet is used to trade short to medium term moves up to a week in length
• Whereas quarterly contracts are designed for holding longer term moves such as a month or more

As spread betting is primarily a tool for trading short term moves, most traders will use the Rolling Cash bets.

Different quotes for the different spread bets

As you can see below the 2 spread bet markets for the FTSE 100 quote slightly different prices.

• FTSE 100 Daily Cash bet quoted at 4346-4348
• FTSE 100 June quarterly bet trading at 4322-4328

This is because of the way how the bets are financed,as spread betting offers leverage. Leverage is where you only have to put up a small deposit, usually around 10%, to control the full value of an asset.

For example, if you call up a regular stockbroker and buy £1,000 worth of Marks & Spencers shares he'll expect you to pay the full £1,000. If you bought the same position using spread bets you'd only have to put up around £100 and the rest would be lent to you, although you will not have to take out a £900 loan because -

• Daily cash bets offer a tighter bid-offer spread but if you take a position overnight you'll have to pay a small financing charge
• Quarterly bets - A wider bid-offer spread but the financing charges are built into the bet, so take a position overnight and there will be no overnight charge

As indicated above, Daily Cash bets are normally the ones to use when short term trading the market, ie positions of under 7 days. Whereas when longer term trading, ie over 7 days, the quarterly bets should be cheaper even though the bid-offer spread is wider.

Technical knowledge is not so important

The person new to spread bets often gets confused about the inner workings and the financing, but my advice is to not worry.

Having an expert knowledge of the mathematical formulas used to price spread bets won't help you make any more profits, nor lose less - that will all be down to your view on the market and how you trade it.

Instead, realise the spread betters quote the same dealing price for all their clients, whether for those just starting out or multi-millionaire speculators who have been in the game for decades. So if the professionals are happy to deal at the quoted prices, so should you be.

No currency risk with Spread Bets

Currency risk is always a hassle for traders when they trade foreign products. Speculate in Gold and the profits and losses are in US Dollars, trade European Shares and they're in Euros, buy the Swiss stockmarket index and that's in Swiss Francs etc.

But with spread betting you always trade Pounds per point whichever market you're trading and that's a nice touch.

• Tax free profits - Spread betting is classed as gambling and therefore all profits are 100% tax-free. The other advantage is that you won't have to fill in any trading related information on your annual tax return
  
  
• No commissions or Stamp Duty - The spread bet broker makes his profits on the difference in the bid-offer spread so dealing is not technically free. But trade shares on the London market and there's no Stamp Duty (0.5%) to pay. Saving 0.5% might not seem so much but it's a hell of a saving if you regularly short term trade individual stocks
  
  
• Leverage - It's both an advantage and disadvantage (see below). The advantage factor is where small movements in the underlying can translate into large profits as a percentage of money invested
  
  
• Trade with smaller amounts of money - if you want to trade the FTSE 100 futures each contract is worth £10 a point. But with spread bets it's possible to trade £1 or £2 a point. This also adds to flexibility as if you buy the FTSE using £5 a point you can take incremental profits or losses of £1 or £2 etc
  
  
• Instant access to all the markets - With one single account you can have access to virtually all the important global markets. Trade Gold today, the Japanese Nikkei tomorrow, and then Google shares the following day
  
  
• The ability to easily go short - Selling short is where profits can be made from lower prices. For example, you could sell short Wall Street at 8,500 and buy it back if it goes to 8,000. More on short selling here
  
  
• Good liquidity - The spread betting firms have to offer a two-way price in all market conditions, this means that traders can always deal
  
  
• 24 hour trading - Many of the world's bigger markets now trade 24 hours a day. And whereas you might not want to deal at 11pm, the ability to do so is always welcome
  
  
• Good internet software - Most spread betting business is done online and the brokers collectedly have some outstanding online software. Also as well as trading it can be used for charting, research, setting alerts etc
  
  
• Plenty of training offered - many of the brokers offer their own free training courses, whether online, in print or informal 1-2 hour meetings
  
  
• Controlled risk bets - These are bets where your total risk is known when you first place the trade. They're more expensive than a normal trade but can offer peace of mind to either the beginning trader or one who places a very large trade. More information on Controlled Risk bets
  
  
• Credit offered - Depending on who you are and if you've got a good credit rating the spread betters offer a credit account. To some this might be an advantage
  
  
• No currency risk - Spread bets can be traded on many of the world's markets but of course only the UK ones are quoted in Sterling. But all spread bets are traded via Pounds per point so there's never any currency risk or necessity to change Dollars or Yen back into Sterling
  
  
• Unique markets - It's not just the big markets on offer. Spread betters offer markets on property and Binary Bets which are similar to fixed odds bets - more information on Binary Bets

Stockmarket/Trading Providers
Spread Betting brokers CMC Markets TD Waterhouse Spread Betting E*TRADE Spread Betting	Online Brokers E*Trade Hargreaves Lansdown Stockbrokers TD Waterhouse	CFD brokers Saxo Bank Online Trading TD Waterhouse CFDs City Index

• Leverage - Leverage is similar to fire - it can be your best friend but also your worst enemy so it has to be used intelligently. Don't forget the streets of Wall street and the City of London are littered with great traders who lost it all because they used too much leverage....
  
  
• Tax-free - Tax-free is only an advantage if you make profits because if you lose the losses cannot be offset against capital gains made elsewhere
  
  
• Cannot bid or offer the market - With most financial products, although not spread bets you can often buy at the bid price and sell at the offer. But with spread bets you'll always have to pay the offer or sell the bid and that can be expensive
  
  
• Sometimes too easy to gamble - does spread betting promote gambling? No, but that doesn't mean it's not easy to get too involved and addicted to the thrill
  
  
• Wide bid-offer spreads - Spread bet brokers don't charge any commissions, their profits are built into the bid-offer spreads. Some punters have previously complained that the spreads are often too wide and this may be true. But wide spreads only do real damage if you do a lot of 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

But this is somewhat like asking 'which is the best high street bank'. Personally I use Natwest and have been happy with their services over the years. There are no doubt plenty of other satisfied customers but there will also be people who think otherwise and can equally recommend further banks.

Similar types of conclusions are levelled at the spread bet brokers. One person only has good things to say about the XYZ spread bet firm but somebody else might report that there are far better brokers to use.

My point is that like the banks all the spread bet brokers are as good and as bad as each other. My advice to finding the best broker is to do the following -

• Look at a broker's online software and how it compares to the other firms
• How tight are their spreads - look for the broker that offers the smallest spreads
• How much is their minimum bet - important if you're just starting out as you want to be able to initially keep any potential losses to a minimum
• Call up their helpline and see how quickly they answer - quick and efficient is obviously what you are looking for

The good news is that opening an account with a spread bet broker is usually extremely efficient. So if you don't like one broker vote with your feet and move to another.

• LearnMoney.co.uk financial directory - Spread bet brokers

Stockmarket/Trading Providers
Spread Betting brokers CMC Markets TD Waterhouse Spread Betting E*TRADE Spread Betting	Online Brokers E*Trade Hargreaves Lansdown Stockbrokers TD Waterhouse	CFD brokers Saxo Bank Online Trading TD Waterhouse CFDs City Index

However, spread betting offers traders leverage so all profits and losses are magnified. And as I mentioned above leverage is like fire - it can be both your best friend and worst enemy.

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 people just starting out. Experience is therefore important.

Experience though can be split into two -

1. Experience of how to trade using spread bets - how the online software works, what are the different orders, how do you use them etc., and
2. Experience of how the markets really work - and how you can profit from them

Both of these take time. If you are new to spread betting I therefore strongly encourage you to tread very carefully for the first several months.

I was a financial broker for many years and it always shocked me how ill-prepared some clients were. In effect many of them jumped in at the deep end without either checking how deep it was, or if there was actually any water. Of course they lost money, and some of them enormous amounts.

How to correctly approach spread betting

1. Open an account with a spread betting broker with an initial amount of no more than £500

Then trade everyday. Buy the market, sell it short, trade many of the products offered whether that be American T-Bonds, the FTSE 100, Dollar/Yen, Gold, Corn etc. Also, get used to the online software and all the different orders that can be used as well as when and how to use them.

The goal of this exercise is not to make money, if that happens it's a bonus. The goal is threefold -

1. To make sure you know the ins and outs of the online software, how it works, it's strengths, what you can or can't do with it etc
2. To make sure you fully understand the process of going long and short, how the bid-offer moves, which bet to trade (the daily bet or the quarterly) etc
3. To get you used to making and losing money. The excitement of winning and depression of losing has no place is a trader's makeup

Risk the minimum amount of money possible on every trade so it doesn't matter if you get something wrong and the market moves heavily against you. So what if you lose £5 or £9 on any one trade?

Again, your goal is not to make money, in fact it's preferable if you lose!

Why? Because losing often teaches you far more than when you win, so analyse your losses - why did you lose, was there anything you did wrong, are you forming any bad habits that should be eliminated etc.

Be somewhat wary of using 'Dummy Accounts'

Most of the brokers offer a dummy account where you're allocated say £10,000 in play money. Use this to trade the markets without risking real cash.

However, personally I think it's better to start risking proper money in the markets, albeit small amounts. Successful trading is as much about psychology than anything else and when real money is at risk the psychology plays a proper role. Who cares for example if you lose £5,000 in fake money during an afternoon, you'd probably just smile.

On the other hand if you're unsure of how the trading software works or need to gain experience of entering different orders and understanding how they work without risking your own money then obviously the dummy accounts are a good idea.

2. Slowly increase the size of your account

When you're comfortable with using spreads bets begin to increase the size of your account, but only do this slowly.

If I had a total of £5,000 in risk capital to invest I'd initially use £500 and then I'd add another £500 - £1000 as I got more experienced.

Trade for another few months and see how you're getting on. If you are losing money, don't add any more cash to the account until you start to turn profitable. If however you are profitable, then slowly add in more of your overall capital to your trading account.

Summary

Use the following guidelines above and though I can't ensure that you will make money I can however promise you -

• That you'll get an excellent education of how spread betting works, and
• You'll be head and shoulders above the majority of new spread betting clients who sadly don't give themselves enough time to learn the intricacies of trading, or at least get introduced to the finer points of speculation

Good luck!

See also

• Orders - What are the different ones - how they work
• Introduction to 'Short Selling'
• FAQ section - If new to spreading what should you trade
• FAQ section - Which Spread Betting firms do you recommend
• FAQ section - Why 'capital preservation' is the most important aspect of Spread Betting