What is spread betting?
It’s not a case of win or lose
The term ‘spread betting’ can initially throw up the wrong impression. This is because the word ‘betting’ is commonly associated with gambling. Although there are some similarities between the two, such as the tax benefits, spread betting is a form of trading and investing.
At your local bookies or on-line betting shop, every bet that you undertake will result in a ‘win or lose’ outcome. This is known as fixed-odds or parimutuel betting.
This is not the case in spread betting. In spread betting you are speculating on the move of the underlying asset. If you are correct, you will see the value of your portfolio (trade) rise. If you are incorrect, the value of your portfolio will fall.
The ‘bet’ is placed between yourself, and your dedicated broker.
Figure 1 spread betting versus gambling
Trading on the underlying asset
Spread betting is known as a derivative. According to Investopedia, ‘a derivative is a financial security with a value that is reliant upon, and derived from, an underlying asset’.
When the FTSE100 rises, the UK100 spread betting index will also rise in unison.
Unlike buying shares through your bank or stockbroker, you never own the underlying asset.
So why ‘spread’ betting?
When you place a spread bet, there are two prices to every quote. They are known as the offer, where you can buy, and the bid, where you can sell. The difference between the two prices is known as the ‘spread’.
Figure 2 Pepperstone forex spreads 05/09/2022
How to place a spread bet
The first thing that you need to decide is which market or asset you want to place your trade.
The second is to open a trade ticket and decide what direction you expect the asset to move in. This will either be to Buy (go long) or Sell (go short).
The third is the amount you want to trade. This is an important factor that needs to be understood. This is NOT your overall stake but how much you are trading per pip or point.
The fourth is your stop loss and limit order. This is where you will cut your losses should your trade go wrong, and where you look to take your profit if your trade should go right. Although it is not a necessity to place these orders at the outset of a trade, it is regarded as ‘good money management’ to do so.
Advantages of spread betting
Like placing a bet through your on-line bookie, profits made from spread betting are exempt from capital gains tax. This will depend on your personal circumstances. It should also be noted that you cannot offset your losses against your tax liabilities.
You will often hear trades talk about the use of leverage. This gives you the ability to trade in larger positions than your normal deposit would allow.
A retail trader is offered 30:1 leverage. For every pound, dollar, or euro that you have in your trading account, you can trade 30 times that size in the markets.
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