Which brings us to discussing spread betting, the subject of this guide. Spread betting is very straightforward, and consists of placing bets on the markets explained above, as well as interest rates, stock indices, and even sports and politics, although this guide concentrates on financial spread betting.
There are some significant advantages to using spread betting rather than conventional trading on the markets, and these will be explained. Not all spread betting bookmakers offer all the markets, but most offer many of them. If you have a particular requirement then you should make sure that the dealer you place your account with covers it.
Is spread betting gambling? Certainly for tax purposes it is, which is to your advantage as gambling winnings are not taxed in the UK and some other countries. But gambling does not mean it has to be risky, and it can be no more risky than any other form of financial trading. The risk to a great extent depends on how well you plan your bets, which includes not only which markets you bet in, but also how you manage your money, which we’ll talk about later.
What can you spread bet on?
UK spread betting firms now quote prices on thousands of assets and markets.
– UK, US and overseas shares (listed on recognised exchanges)
– All major stock market indices (such as the UK FTSE 100, US S&P 500, German Dax 30)
– Certain stock market sectors (such as banks, oil & gas, and real estate)
– Commodities (such as oil, gold, and coffee)
– Fixed income securities (such as UK gilts and US Treasuries)
– Foreign exchange (such as sterling dollar, sterling euro, dollar yen, other currency pairs).
With spread betting you back your judgment by placing a bet on a price going up or down. There is no formal arrangement such as going “short” on a stock for you to profit from falling prices, you just “buy” or “sell” the spread bet.
So that explains the “betting” part of spread betting, but what about the “spread”? As you will see, the spread is the way that your bookmaker or dealer makes his money, saving you worrying about paying separate commissions or fees. The spread is the difference between the price you can “buy” at and the price you can “sell” the same thing at. If you buy to make a spread bet, then you must sell to close it; if you sell to make your bet, then you buy to end it.
It’s easiest to explain this by a real-life example. Let’s suppose you are interested in spread betting on the FTSE 100, which is the London-based index of the hundred most capitalized, or most valuable, UK companies. Your spread betting provider might quote you 5986p – 5990p on this index. The reason he gives you two values is that he does not know if you are going to buy or sell the index. The higher price is the one you can buy at, and the lower price is for selling. The difference between the two is called the “spread”, in this case 4p or 4 points.
You think that the FTSE 100 is due to rally, so therefore you want to buy with your spread bet. You have to decide how much you want to bet. The minimum you can bet depends on your spread betting provider, and maybe 50p or £1. Say you bet £5 per point, which means for each point change in the index you win or lose £5.
You place your bet by buying the FTSE 100 at 5990 for £5 per point, and then wait to see if you’re right. In this case, the FTSE 100 rallied as you expected, and later your provider quotes you 6016p – 6020p. You decide to exit your bet, and to do this you sell your open position at 6016 – remember that you have to sell at the lower price quoted and buy at a higher price, which gives your provider his profit. As you bought at 5990 and sold at 6016, you have gained 26 points which at £5 per point means you won £130.
Spread betting is as simple as that. It doesn’t really matter what number the FTSE 100 is, you’re just betting the amount you choose for each point of movement. It’s the same if you spread bet on currencies or other things, all you have to do is make sure what counts as a “point”, and then bet the amount you decide to stake per point.