Spread betting is a tax efficient derivatives product that allows traders to speculate on the price movements of thousands of financial markets including Indices, Shares, Currencies, Commodities and more. By means of margin, or leveraged trading it’s possible for users to trade using the value of more that their initial deposit.
Spread betting is a way to trade on the price movements of global financial instruments. You can speculate on rising as well as falling markets, meaning you can potentially profit even when market prices are falling.
As with CFD trading, spread betting is a form of financial derivative trading. You don’t buy or sell the underlying physical asset. Instead, you place a trade based on whether you think the value of an instrument will go up or down.
Spread betting is only available in the UK, and is considered a tax efficient way to trade.
You can spread bet on thousands of financial instruments. These include a range of forex pairs, commodities, indices and shares.
How does financial spread betting work?
Spread betting works by placing a ‘buy’ or ‘sell’ trade based on whether you think an instrument’s price will go up or down. If you think an instrument’s price will rise in value, you would go long or ‘buy’. If you think an instrument’s price will fall in value, you would go short or ‘sell’. You net a profit or loss depending on whether or not the market moves in the direction you had anticipated.
Despite similarities in naming conventions, financial spread betting is different from sports spread betting.
What is leveraged trading?
Spread betting is a leveraged product. Leveraged (or margined) trading is a type of trading where you can place a trade by depositing just a percentage of the full value of your trade.
This initial deposit is what is known as margin. So for example, a trade which has a leverage of 50:1 would require you to deposit a 2% margin (or 2% of the full trade value) to open a position. Profit and loss are calculated based on the full value of the trade. This means that with leveraged trading you can generate large profits if the trade moves in your favour. Remember, however, that your losses can also be magnified if the trade moves against you.
The degree of leverage you can get will often vary. It can depend on the broker, underlying instrument and size of your trade.
What can I spread bet?
You can spread bet across a wide range of asset classes and instruments. These asset classes include forex, indices, commodities, bonds and shares. Within each asset class you have the individual instruments that you can trade. For example, you can trade on forex pairs such as EUR/USD and USD/GBP, and indices such as the FTSE 100. You can also trade on commodities such as gold and oil, plus various company shares.
Is spread betting tax-free?
Spread betting profits are currently exempt from stamp duty and Capital Gains Tax (CGT) in the UK. This makes it an attractive form of trading for those who live in the UK.
The reason you don’t pay stamp duty is because you don’t own the underlying asset. You should bear in mind that tax treatment depends on your individual situation. Tax laws can also be subject to change.
What is a spread?
Every instrument you trade will have a ‘buy’ and ‘sell’ price. The price at which you would ‘buy’ (say a share or forex pair for example) will be different from the price at which you would ‘sell’ the same instrument. The ‘buy’ price will always be higher than the ‘sell’ price. The price of the underlying instrument will be in the middle of the two prices quoted by the broker. The difference between this ‘buy’ and ‘sell’ price quoted by the broker is called the spread.
Different brokers offer different spreads. When you place a spread bet, you should remember that the spread is a cost. Generally speaking, the tighter the spread, the better value you’re getting as a trader. Wider spreads mean your margin for profit will be lesser.
How do I spread bet?
- Choose a provider – you should look for a reputed and regulated broker that offers competitive spreads and margins.
- Select a market – decide what you are going to trade. This might be forex, indices, commodities, bonds or shares.
- Opt to go long or short – if you expect prices to rise, go long (buy), and if you expect prices to fall, go short (sell).
- Select a stake size – profits or losses are based on your stake size, multiplied by the number of points a trade moves for or against you. A pip is the price movement for a forex spread bet. A point is the price movement for any other type of spread bet.
- Set a stop loss – this can help limit your losses if the market moves against you.
- Monitor your position and close out – keep an eye on potential profits or losses and close out the trade.
Which is the best spread betting platform?
Platform stability, security, broker reputation and price transparency are important. The best spread betting platforms are regulated and should offer competitive spreads across a range of markets. Different brokers will often offer different spreads. It would be useful to research the spreads that they offer before you choose a platform.
It is worth finding out if they charge any commission or additional fees. The platform should be easy to use and should also provide various risk management and trading tools. These can help with your fundamental and technical analysis. Spread betting is a form of margin trading. So you should also compare the different margins offered.
Spread betting strategies
When it comes to spread betting, and trading in general, there are two main strategies which are used. These are technical analysis and fundamental analysis. Technical analysis looks at the market sentiment behind price trends. It attempts to predict future price movements. A lot of the analysis will be done from charts.
Technical indicators can include trendlines, trading patterns and moving averages. Fundamental analysis looks at anything that can affect an instrument’s price. This includes related economic and industry factors. Public data is used in this analysis, including interest rates, the overall state of the economy and company revenues. It is also a good idea to keep up with current affairs and global news. World events can influence market prices.
There are a range of brokers offering spread betting platforms in the UK. So do your research well and choose one that is best suited to meet your individual trading needs.