Spread Betting: What Is It and How Does It Work?

This article goes over the crucial elements of Spread Betting. From what it is to how it works, reading this article will provide the answers to that.

What is Spread Betting? How Does It Work?

As its name implies, Spread Betting is a world-popular derivative that is based on betting on the outcome of the instrument’s price and is tightly related to spreads. This derivative allows traders to speculate on the future prices of numerous financial instruments. By that, we mean currency pairs, Indices, Commodities, and other underlying assets. 

The advantage of this kind of trading is that investors don’t have to take ownership of the particular asset. Since it’s heavily dependent on spreads, it means that the difference between the buy and sell values you pay defines the process. 

It works by using bets instead of buying/selling the concrete product. For example, traditionally, you would pay to buy Tesla shares and then sell them to make a profit. In spread betting, you achieve the same but you don’t become the owner of the product, you just speculate on the final price. 

Understanding The Components of Spread Betting

Successful spread betting can’t be performed without properly understanding it. To explain its components easier, we’ve divided the following part of the article into three instances. 

Each of them explains what the essential parts of spread betting are. For now, remember that the three most important elements of spread betting are: spread, bet sizes, and duration. Keep reading to learn what each of them represents.

What Is the Spread?

The spread reflects the difference between the two prices: buying and selling one. These two are also known as the offer and bid. Spread is basically the cost of trading. Since the trade costs a certain price, it is included in this difference.

Because it is so, you will always pay a slightly higher price when buying. Going by the same logic, you will always sell the product slightly below the market price.

Bet Sizes

Bet size is the amount of money you want to bet with per every movement of the underlying asset. Choosing your bet size depends on you, except that you have to fulfill the bare minimum accepted for the market. 

By defining the bet size, you decide how many units of currency (EUR, GBP, USD) will be assigned to each point at which the market moves. Bet size is basically your stake in the trade. If you win, you gain the number of units of the chosen currency per every point the market changes. Losing is the opposite.

Duration

Duration in spread betting is the amount of time during which your position remains open. The total time which passes before your position expires is what symbolizes the duration. 

You are free to close your position at any time. This has to be before the elapsed time expires. The market has to have an expiry date when the profit or loss is concluded.  

The Benefits of Spread Betting

Each trade comes with its own demands, costs, and risks. Spread betting is no different. To help you understand if it’s the right thing for you, we will point out some major advantages to it. However, to fully benefit from spread betting you need to properly do it. Read on to get familiar with the most notable pros of this type of strategy.

Tax Efficient

Spread betting is tax efficient above all. This derivative strategy allows you to keep the entire profit you make. It is especially valuable if you’re a UK trader. You see, in the UK, investors do not pay UK Stamp Duty for spread betting. 

The same stands for capital gains tax. The downside to the entire thing is that the law is always subject to change and dependent on individual circumstances. Make sure you are well informed on this subject before attempting anything. 

Commission Free

As we’ve already described the circumstances of spread betting, it being commission free is a huge benefit. Why is it so? Well, spreads mean that the cost of the trade is included in the difference between the buy and sell price. 

This difference is visible from the inside of your trading platform. Since the cost is already reflected in that difference you don’t pay a commission. If you leave your position open overnight though, charges could still apply.

Leveraged

Thanks to the leverage that follows spread betting, you can do more with less capital. Your initial capital in this case is called margin. Starting with a small deposit but with higher leverage, you can gain greater exposure to the trading instrument. 

The higher the leverage, the bigger the exposure. The profit or loss is calculated based on the full value, not just the margin. So careful when choosing your exposure. Higher leverage also means greater risk.

Flexible

The flexibility of Spread Betting allows traders to go long or short. Without buying the financial product, you could bet on the direction in which you predict the price to go.

If you expect the asset to go higher in price, you open a long position. On the other hand, if you believe the instrument’s price will decrease you’re in for a short position.

Does Spread Betting Fit My Needs?

As profitable as it could be, Spread Betting bears certain risks. In that sense, it may not be suitable for everyone. 

That’s why a derivative strategy like this one needs strong risk management. Not every trader is ready to risk big. So, it would perhaps be best to get familiar with every aspect of it thoroughly through a Demo account before investing seriously.

To Trade Short-Term Opportunities

Spread betting is probably ideal for traders who grab short-term opportunities. If you are this type of investor, this strategy might be just the right thing for you.

Using quick market changes means holding your position open for a few days or weeks. Spread betting works well for these short positions. Positions held for a longer period usually don’t result well for traders who spread bets.

To Make Their Own Decisions On What To Invest In

When it’s about spread betting, no one can limit you. As far as investing goes, the amount of capital you pour in is entirely your decision. Broker in this case is only your execution service.

They have no power over your trades. Your broker-dealer can neither tell you how to perform the trade, what to trade, and how much to invest.

Diversify Portfolio

Brokers offering spread betting allow access to a palette of financial products. Traders can choose between different asset groups and invest in just about anything. Whether it’s currency pairs, commodities, or indices, the choice is up to the investor. 

Your broker can provide you with a range of choices, the decision of what to invest in is up to you. While you could stick to the most popular currency pairs, you could also spread bets on exotic pairs. Other groups of tradable assets are in the game, too. 

Active or Passive Investor

Spread betting is quite suitable for investors who don’t have a trading schedule. These are usually the traders who just occasionally decide to invest. In contrast to long-term investors, traders who spread bets have the freedom to do it when they find fit. 

Sometimes that could be several times a day. On other occasions, weeks may pass before the investor spread bets again. The choice is up to them. 

Conclusion 

As our article explains, spread betting is a trading strategy based on price speculation. Investors compete on predicting the next direction the market will take and profit from the outcome of the prediction. 

The three main elements of spread betting are the spread, the bet size, and duration. We did our best to explain all these aspects and how you could manipulate them in order to achieve your investment goals. 

This article also points out key advantages of spread betting and ways you could decide if it’s the right thing for you. What we can recommend is a lot of practice before you decide on putting bigger capital into it.

Swati