What is Spread Betting?

Spread betting is variously described as betting, trading, gambling or investing and is a phenomenon which has really taken off over recent years.  It provides spread bettors easy access to a range of financial instruments, which were once only accessible by hedge funds and investment banks.

There’s a wide world of possibilities on offer. Spread betting products include shares, commodities, house prices, currencies, options, share indices and sporting results.  No matter what your particular passion might be, or where your expertise lies, it’s pretty much guaranteed that you can discover your spread betting niche.

Conventional investors are often discouraged by spread betting due to the terminology and not understanding how to place an order (which is generally a simple task).  The conventional thought process of placing an order, is to work out how much money you wish to invest and then dividing this by the share price to give you the number of shares you wish to purchase, allowing for brokerage and taxes in the cost.  In the event the price falls, you are not required to post margin as you have fully paid for your shares.

With spread betting, the investor first determines how much they are prepared to lose per point/pip move and then the online order ticket calculates how much deposit is required.  Your spread betting account needs to have sufficient funds in the account in order to fund the deposit, also note there are no brokerage and taxes (it’s already included in the price/spread).  In the event the price falls, the spread broker will notify the investor to post additional margin into their account or automatically close out the trade.  Most spread betting companies will not let you lose more than you have deposited in your account.

Let’s look at these two ways in principle –

Conventional Investor
Buys 1000 Vodafone shares at £1.50, with a total outlay of £1,500.  The stock drops by 10 pence (points) to £1.40, the market value of your shares is now worth £1,400, meaning a £100 loss.

Spread betting Investor
Having the same risk profile as the conventional investor, the spread better will need to execute a trade at £10 per point at £1.50, which has the same market value above i.e £10 x £1.50 = £1,500.  In the event the stock drops 10 points (pence) the lose £100, being £10 x 10 points, which is the same as the conventional investor.

As you can see from the two examples above, the risk profile is the same.  In addition, the spread better would only be required to outlay a deposit of say 5% on their original traded market value being £75 (£1,500 x 5%), as opposed to the £1,500 cash outlay.  The minimal outlay required in spread betting versus conventional investing is referred to as leverage or margin.

To minimise the downside risks of being called for margin or automatically closed out, the spread bettor can set up a’ stop loss’ position whereby the bet is closed off once a stock hits a specific price.  This is a very useful tool in minimising your downside in the event the market moves strongly against you.

Another key point you should understand, is that you don’t physically purchase or own the financial product, share or commodity you select for spread betting. You are simply betting on changes in the price or level over a specified period of time.

If spread betting is for you, go into it with your eyes open, understanding the full picture.  It is wise to start small to get an understanding of the terminology and functionality of each trading platform.  Arm yourself with as much knowledge as you can about your chosen field and check out the substantial range of information about spread betting agents on the web.   Remember they all have their niche service and depending on the product traded will differ in spreads, so it pays to shop for the tightest!