Trading The Spread – What Is Spread Betting?

Spread Betting stands out due to the potentially high profits that can be made. If you bet on gold and it rockets, so do your profits.

As it is considered gambling, your winnings are not subject to capital gains tax. If you like the way Spread Betting works, but you don’t want to follow the stock or currency markets, you can bet on sporting events.

If you think your team are going to do well and you want to find out how to put some money on them, visit our Sporting Spread Bet Section to see how it all works. Otherwise, read on, and see how financial spread bets work.

Example Of How To Place A Spread Bet

Let’s keep it simple and stick with the FTSE 100.

  • You log on to your provider’s website or software.
  • The FTSE 100 is set at 3949 Sell – 3950 buy
  • If you think FTSE is going up you bet ‘long’
  • i.e. you ‘buy’ at the higher price
  • Don’t worry, you are not actually ‘buying’
  • Buy and sell are ‘borrowed terms’
  • Someday someone will come up with better terms! Anyway,
  • You buy (bet) at £1 per point
  • When you close your bet, the FTSE has gone up to 4000
  • 4000 minus 3950 is an increase of 10 points
  • at £1 per point you have made £10 (10 x £1)
  • (Please bare in mind this is a simple example, and indexes can move very quickly!)
  • If you thought the FTSE was going to go down,
  • You would bet ‘short’
  • i.e. you would ‘sell’

Gearing Up In Spread Betting

Spread Betting is automatically leveraged or ‘geared up’.

In simple terms, this mean that if you open a bet with a £10 stake, each point it moves in the right direction up you get £10, (or lose £10!)

In the previous example, a £10 stake and a 20 point move would provide a gross profit of £200

What is Margin?

  • To cover the bet, you need to have a ‘margin’
  • Each ‘instrument’ has a different Min IMR (Minimum Initial Margin Requirement)
  • E.g. for EUR/USD the Min IMR could be 40 x (dependent on Broker)
  • So for a £10 bet you would need £400 in your account to cover the bet (40 x 10)
  • For Gold, Min IMR is around 100, indexes around 30.
  • Your broker software will generally tell what the Min IMR is before you place a bet
  • (You may have to work out your margin with a calculator
  • by multiplying the Min IMR by your stake amount
  • e.g. Min IMR 30 x stake £10 = a margin requirement of £300)
  • If the bet goes entirely the wrong way,
  • and the margin has almost gone (80% of your account with some brokers)
  • you will get a ‘margin call’
  • Margin Call

  • A margin call means your bet will be closed
  • To prevent things getting this far
  • You should always apply ‘stop losses’

Stop Losses

  • Many providers put automatic stop losses on bets
  • A default stop loss from many providers would be between 50% and 100% of your margin (deposit)
  • These can be altered – reduced or increased
  • Where to set the stop loss?
  • That depends on your personal circumstances
  • and your understanding of the particular market you are trading in
  • Stop losses do have disadvantages
  • But, arguably beginners should always place stop losses
  • Some providers have stop loss, and regular accounts
  • Some Brokers software shows stop losses as point levels, not dollar amounts, so have your calculator at hand to convert to real money
  • Stop losses are not 100% fail-safe – see gapping in our Trading Glossary.

Stop Wins

  • These are applied to stop the bet once it reaches a level
  • The level is decided by you
  • You would do this to get out while you are ahead,
  • i.e. you are winning, but the trade may change direction

Bet variations

Different providers offer slight variations, but mainly you will bet on something going up or down

Bet duration or ‘expiry’ can be;

  • Daily (intraday)
  • Rolling Daily (interest is charged overnight)
  • Monthly, and Quarterly
  • Remember you can always stop the bet before it expires

Demo accounts

Many Brokers offer demo accounts so that you can learn to spread bet without parting with you cash, see our Recommended Brokers to find out who is providing demo accounts

Disadvantages

  • You can lose a lot of money if you are careless
  • The ‘spread’ varies between brokers, so compare them

Advantages

  • You can bet from as little as a pound
  • You can win a lot of money if you are smart
  • You can bet on practically anything
  • Winnings are tax free
  • Spread Betting is regulated by the Financial Services Authority, so if you have a dispute with a broker you are not on your own.

It is said that spread betting is not for the feint hearted, but, if you keep your cool, manage your money, and do your homework, it can be very profitable, and unlike stock trading, all winnings are tax free. To see which brokers are offering the best deals visit our Spread Betting Brokers page.