Spread betting has long been used as a way to make money on the stock market and other investment products, but it can remain unclear as to what exactly spread betting actually is and why it could be useful as a wealth building tool.
Here’s an overview of what spread betting is and how it works, so you can then determine whether or not spread betting is an appropriate trading option for you.
Spread Betting Explained
Spread betting is a type of wagering that allows you to bet on the price movement of an asset without actually owning the underlying asset.
This makes it different from traditional forms of investing, where you would need to purchase the asset outright.
Spread betting allows you to take a position on whether you think the price of an asset will rise or fall, and you can make money if your prediction is correct, but lose money if you are wrong.
There are many different assets that you can spread bet on, including stocks, commodities, currencies, and many more.
With each opportunity, there are two prices: one which represents the bid (the lowest price someone is willing to sell) and one which represents the offer (the highest price someone is willing to buy), this is called the spread, and it is essentially the fee charged by the spread bet broker for placing your bet.
For example Tesco stock 100p to buy, 99p to sell = 1p spread.
The aim of the game is to predict which way the asset will move (either up or down). If you are correct, you will win your stake (say £1 per point) for every point movement in the correct direction.
But if you are wrong you will lose your stake for every point it moves in the wrong direction.
Please note your stake could be £1 per point, £5 per point, £50 per point or anything else you wanted it to be up to the spread bet brokers maximum limit.
What is the Best UK Spread Betting Platform?
I have used and tested 3 spread betting platforms in the UK so far, and my stand out favourite is IG.
IG is a well established and trusted online brokerage firm that covers several divisions in the investment scene. They are also a listed company and regulated by the FCA for added comfort.
They can trade traditional shares and funds, CFDs, forex, as well as spread betting.
In total, IG brokers can provide access to over 17,000 spread betting markets – which is the largest in the sector.
This covers a huge variety of assets, with a focus on forex (foreign exchange), indices, shares, and commodities such as oil, gas, gold etc.
Each and every spread betting market offers a long (going up) and short (going down) position, as well as leverage. Leverage means you don’t have to stump up the full cost of your exposure, for example a £10,000 exposure to Shell shares may only cost a £2,000 deposit to trade.
UK retail clients also have the added protection of that all-important Negative Balance Protection in place. This means you can never lose more than your balance permits when entering a leverage position at IG.
In terms of fees, IG allows you to use its spread betting platform in a commission-free manner. You will, however, need to keep an eye on the spread – which is largely very competitive at IG, but can move during certain times of the day.
For example, indices and shares can be traded from just 0.1 points, commodities at 0.3 points, and forex at 0.6 points.
If you think that IG meets your spread betting needs, you can trade directly through the provider’s website, they also offer a mobile app that is both iOS and Android compatible.
The minimum deposit at this UK spread betting platform is £250. IG supports debit cards and UK bank transfers.
Spread Betting Strategies
There are many different types of spread betting strategies available to traders, some of which are fairly simple to understand, and others which can appear incredibly complicated.
For the purposes of this introduction to spread betting article we will briefly cover three of the main types new spread betters may wish to consider.
Trend Following - this strategy does exactly what it says on the tin, insofar as you identify an asset such as a share or commodity that has been in an up or down trend for some time, and you simply identify which direction you wish to place your bet, how much you wish to bet, and which entry and exit points you wish to target.
Support and Resistance - this strategy involves looking at technical charts and trying to identify where assets struggle to pass a certain level on the upside or downside. Once you have identified these support and resistance levels you can then place bets in the opposite direction as each of these levels is reached.
Market News - this strategy arguably involves the most work and the earliest of mornings. You need to have browsed all the market newspapers, online resources, and TV programmes, to see if you can find any trading opportunities that may arise when the 8:00 AM starting bell opens the markets.
This strategy is probably the most difficult of the three as even if you have the news in your hand, you still don't know what the markets reaction will be to it, as often good news can make prices go down, and bad news can make share prices go up.
Spread Betting Stocks
Spread betting stocks is probably the recommended entry point for most new traders.
At its most basic level it can be used tactically for placing short to medium term trades on stocks you think will rise in the coming hours, days, weeks and months. Spread betting stocks is not recommended for the long term as the cost of overnight leverage fees can add up.
However, unlike traditional investing, where you can only buy shares you assume will go up in price, with spread betting stocks you can actually trade shares you think will go down in value, such as overpriced shares or shares of a company that is really struggling.
This ability to make money from a falling share is one of the major advantages of spread betting.
To recap - If you think the price will rise, you buy (go long); if you think it will fall, you sell (go short).
Is Spread Betting Forex Easy?
Spread betting forex is a way to speculate on the movements of currency pairs, £/$, and you can do it without taking ownership of the underlying asset.
It's a type of derivative trading, which means your profit or loss depends on the price movement of the underlying asset. You can trade forex with a small amount of capital, and you don't have to pay commissions or taxes.
However, most new traders lose money on forex trading and so we would not recommend any budding new spread betters to start with forex trading as 9 out of 10 FX traders lose money.
Start with something far more manageable and easy to understand such as going long on stocks you already are comfortable with.
UK Spread Betting Tax
Another advantage of spread betting in the UK is that it is tax free. Spread bets are free from both Stamp Duty and Capital Gains Tax (CGT), which means you don’t have to report any profits or losses to HMRC.
Tax laws will vary in other jurisdictions outside of the UK and are subject to change.
It is worth noting that the tax rules are slightly different if spread betting income is your only or main source of income. If that is the case then you should consult a tax expert.
What is the Difference Between Spread Betting and cfds?
The main difference between spread betting and CFD trading is simply how they are treated for tax.
As noted above, spread bets are free from capital gains tax, whereas any profits from CFDs can be offset against losses for tax purposes.
You don't have to pay any stamp duty with either product because you don’t take ownership of the underlying assets when you trade.
You can go both long (up) or short (down) with both products, though there are some technical differences in how they both work as noted below:
Spread betting stakes an amount of money per point (e.g. £1, £5) of price movement in the underlying asset such as a share.
For example: if you thought the Tesco share price would increase, you could go long at £5 per point of movement. If the price rose by ten points – equal to 10p – you’d win £50. Alternately, if it fell by ten points, you’d lose £50.
CFD trading exchanges the difference in price from the point at which the contract is opened to when it is closed.
For example: if you thought the Tesco share price would rise, you could buy 20 share CFDs of Tesco – the equivalent of buying 20 Tesco shares. If the price rose by 10p, you’d profit £200 excluding commission fees. However, if it fell by 10p, you’d lose £200.
Spread bets have a fixed expiry date, whereas CFDs don’t expire they roll on.
When it comes to considering risk, both spread bets and CFDs are leveraged products. Leverage lets you receive full market exposure for an initial lower deposit, also known as margin.
Be careful though, while this can help to maximise your potential profits, it can also increase your potential losses.
Spread Betting Advantages
1. Spread betting offers tax-free profits.
2. You can trade on leverage, which means you can trade with more money than you have in your account.
3. Spread betting allows you to go long or short on a market, which gives you more flexibility than traditional investing.
4. You can trade 24 hours a day, 7 days a week with most providers.
5. Spread betting is a commission-free way to trade.
6. You can trade from anywhere in the world as long as you have an internet connection.
7. Spread betting is a fast and efficient way to trade the financial markets.
8. There are no limits to how much you can win per trade.
9. The trading platform is intuitive and simple to use, so even beginners will be able to master it quickly without any difficulty, and can practice with a dummy account risk free.
Spread Betting Disadvantages
1. It can be risky and you can lose a lot of money if you don't know what you're doing.
2. Whereas leverage can be an advantage, it can also be a disadvantage for the untrained.
3. Spread betting can become addictive.
4. It is not as easy as it looks!
7 Golden Rules of Spread Betting
1. Know what you're doing - Spread betting is not for everyone and can be a high risk strategy.
2. Have a plan - Don't just place bets willy-nilly. Have a plan and stick to it.
3. Set limits - Don't bet more than you can afford to lose. Set limits and stick to them.
4. Use stop losses - A stop loss is an order placed with your broker to sell a security when it reaches a certain price. This can help limit your losses if the market moves against you.
5. Don't day trade or trade the FX or commodities markets, you will lose if you are a beginner
6. Remain disciplined - once you have set your plan and rules, do not be tempted to change them as the price approaches your stop loss etc.
7. Don't trade the indices - if you are new to trading we would suggest you don't trade the indices as a starting point as most traders will lose at this game.
Conclusion
Spread betting can be a great way to make money from the fluctuations in the markets.
It's a high-risk, high-reward activity that can be very profitable if done correctly.
However, it's important to understand the risks involved before getting started.
Spread betting is not for everyone, but it can be a great way to make money if you're willing to take on the risk. Just remember, as with any investment, that there are always risks involved and you should never invest more than you can afford to lose.
It all comes down to understanding how spread betting works and what its risks are before investing any time or money into it.
If you are thinking about spread betting or new to spread betting, then I would very much recommend buying and reading some books which I have found personally very helpful. The Naked Traders book is easy to understand for beginners.
Making money trading can be very lucrative, but you really do need to know what you are doing, and this takes both education and time.
Good luck out there.
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