Financial spread betting, what is it?
Published: 9 February 2009
By MoneyhighStreet Staff 3 Comments
Updated: 16 July 2009
Financial spread betting started some 25 years ago when City professionals bet on how much up or down they thought the London Stock Exchange would move.
Spread betting can be undertaken on a variety of events, not just financial. Spread betting on sport for example is very popular.
Whilst spread betting is similar to ordinary betting in that you are betting on the outcome of an event, it differs in that you are not absolutely right or wrong, you are either more right or more wrong.
Also you don’t put down the full bet amount, rather just a deposit, perhaps 10% of the full bet.
Currently, as spread betting is classed as a form of gambling, you do not pay capital gains tax or stamp duty on winnings. Assuming you do win of course!
You can get an online spread betting account quickly and easily with companies such as FinancialSpreads.com and BetOnMarkets.com.
Financial spread betting can be undertaken on a wide range of financial markets including
- Stocks / shares
- Indices eg UK 100, Dow Jones
- Commodities eg oil and gold
- Bonds
- Foreign Exchange (FX / Forex) eg US Dollar, Euro, Swiss Franc
The spread is the difference between the bid (the price you can sell at) and the offer (the price that you can buy at) quoted by the spread betting company.
If you think the price is going to rise you place a buy bet, you go long.
If you think the price is going to fall you place a sell bet, you go short.
The movement of the underlying instrument is measured in points e.g. UK equities 1 point = 1 pence.
When you place your bet you decide what value you are going to place on each point movement, perhaps £1 or £5 per point.
Let’s look at a financial spread betting example.
A share is quoted at 250 – 260. The spread is 10 pence.
- Trader A thinks the price is going to go up so takes a long position at 260 and bets £10 per point on the share going up.
- Trader B thinks the share is going to fall and so takes a short position and places a sell bet at 250 at £10 per point.
The share price rises and the spread quoted is 300 – 310, the traders close their bets.
- Trader A correctly bet that the price would rise and so makes a profit. The spread is 40 pence, the difference between the buying and selling price, 300-260 pence. Trader A makes a profit of £400, 40 * £10.
- Trader B incorrectly bet that the price would fall and so makes a loss. The spread is 60 pence, 310-250 pence. Trader B makes a £600 loss, 60 * £10
To control the amount of risk you are exposed to, there are different types of spread betting order that you can place, for example
- To limit the amount of money you can lose you can place a stop order. In very volatile markets with some spread betting companies a Stop order may not be executed exactly at the price you define. To overcome this, a guaranteed stop order may also be offered which means that it is guaranteed that your position will be exited at the defined point, regardless of the market volatility
- To capture profit at a certain point you can use a limit order.
There a number of companies who offer spread betting services, including
- Cantor Index
- Capital Spreads
- City Index
- IG Index
- Finspreads
Finally a word of caution. Whilst you can make significant profits from spread betting, your losses can equally be significant if the market goes against you.
I don’t know why but one of the things that’s rarely mentioned about spread betting is the lack of commission charges. I used to day trade stocks and the broker charges would kill my profits. Ok, with FSB you have the spread but that can end up being a lot less and it only occurs when you buy so if you have a strategy of say ‘averaging down’, you don’t pay for each sell.
I’ve tried financial spread betting before. And it’s true that the friction costs are the smallest and you can easily start trading with a minimum amount of money.
Too bad there’s not so much literatures & books about it.
One drawback I can think off it that you need a constant check on your position. You can’t just open a position and go to sleep, so to speak.
well literature and books: there is really so much you can learn from books – no one can teach you the psychology of trading and spread betting is 90% psychology, the main problem is that most traders overgear themselves such that they end up in deep holes when the market moves against them – the worst part is that they tend to close the position when they are already kaput.