Spread betting is a type of derivative financial product in that it has no value in and of itself and only achieves value if an underlying assets value changes. Whether the value is positive or negative will depend on the whether the trader decides to go long (buy) or go short (sell).
The basics of spread betting involve a trader speculating on whether the price of a specific asset will rise or fall. The asset can be an indice, commodity, share or currency pair and there are thousands to choose from. Now, if the trader believes the price of an asset will fall, they would sell (go short) at a specific amount per point fall in price.
So that if the asset was a share and it was currently valued at 100p, the trader would go short, for example, at 10 per point. If the share then dropped in price to 85p it would equal a 15 point drop x 10 = 150 profit. The only price to pay for a spread bet trade is the Spread price.
Another point is that the value of the spread bet price-per-point has nothing to do with the actual price of the base asset. A share price could be 10p but the trader went long at 100 per point and would earn 400 if the share price rises to 14p.
If one were to throw caution to the wind and bet 1000 on a price to rise from 2p to 3p and it did, then 1000 would be what you would earn. Similarly, and less attractive to note, the loss would be the same 1000 if the share actually dropped to 1p.
What is a Spread?
A Spread is a difference between the BID and ASK price of a trade. Brokers price Spread Bet shares so that if the actual asset or share price is 100p, the SELL (ASK) and BUY (BID) price would be something like 99p and 101p respectively. In this case, the Spread would be 2p and represents the fixed fee charged by the broker.
In the initial example, the actual profit would be 150 â€“ 10 = 140.
Leverage and Margin
One of the chief advantages of Spread Betting is that it is a leveraged product so the full price of the trade does not need to be paid up front. For example, a conventional trade requiring an investor to pay 1000 for 10,000 10p shares, would earn them 200 if the share price increased by 2p.
However, this would have required an initial outlay ofÂ 1000 plus the resulting commissions and taxes on the profit.
The small deposit or margin required for a Spread Betting trade is calculated in the following way assuming that the margin requirement for the trade was set to 5% (which is quite typical), they were waging 10 per Point and a share value of 100p:
Price/Point x Asset Price x 5% = 10 x 100 x 5% = 50
The 50 margin or deposit will be the same whether the profit was 150 or 1500.
Benefits of Spread Betting
One of the benefits of Spread Betting is the potential to earn whether the markets rise of fall. Also, Spread Betting in the UK attracts zero percent tax and Stamp Duty at the time of publication. However, tax laws in the UK can change at any time so it is wise to keep oneself up to date with the relevant laws and regulations.
Trading time frames can be from a few minutes, hours, days or weeks, offering traders the opportunity to choose a timeframe suitable to their trading style and temperament. Investors can choose from thousands of markets and trade 24 hours a day from the comfort of their homes using online trading platforms provided by a variety of online brokers.
How Do I Get Started?
Never start Spread Betting until you are fully aware of the potential risks involved in any type of trading. Learn how to manage risk using the variety of tools and resources available. Getting started can be a daunting time so open a demo account with reputable online brokers such as CMC Markets to practice trading and find a host of online learning resources.
You can use a demo account to familiarize yourself with the brokers proprietary trading platform and to test trading theories before going live.