Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

Spread betting examples

Published on: 26/01/2022 | Modified on: 09/08/2022

Spread betting can be a relatively easy way to trade the financial markets. It’s also tax-free in the UK and Ireland, being exempt from capital gains tax and stamp duty*. Once you understand calculations to work out spreads and margins, making a trade is straightforward. This article explains how you can go long or short on the markets, depending on whether you expect prices to rise or fall. For each scenario, we calculate the potential profit or loss for the trade.

KEY POINTS

  • The spread is the difference between a broker’s buy and sell price, which is automatically included in the price
  • Spread betting profits are tax-free in the UK*
  • When trading leverage, you deposit only a fraction of the value of the trade
  • You can spread bet on several different types of assets, including stocks, indices, currencies and commodities
  • Spread betting may incur additional costs depending on your individual trade and how long you keep open your position

Example one: Apple (going long)

Please note that, when spread betting shares, an additional spread is built into the spread bet price displayed on the platform and is applicable upon execution of any order.

Here’s a spread betting stock example. Say you want to spread bet Apple on a day that it is trading at 140. Your broker might offer you a sell price of 138 and a buy price of 142, making a spread of four points:

  • Sell price = 138

  • Buy price = 142

  • Spread = 4 (difference between 142 and 138)

You think that Apple’s share price will go up, so you open a long position at £3 per point. Remember, as you’ll be trading with leverage​, you only need to pay a percentage of the total position’s full value.

Our margin rate for Apple is 20%, so you deposit 20% x (£3 x 142) = £85.20. You won’t pay any commission on this because the broker’s fees are contained within the cost of the spread (unlike CFD share trading) but because of this, you need the price to go up more than four points before you can make a profit.

Outcome A: winning bet

Imagine that Apple’s shares rise in value to a new sell price of 162 and a buy price of 166, and you decide to close your position. Because you bought at 142 and sold at 162, you’ve made a profit of 20 points multiplied by your £3 stake.

Profit: 20 x £3 = £60

Outcome B: losing bet

In this hypothetical outcome, you got it wrong. Apple’s shares fall to a sell of 120 and a buy of 124. Because you bought at 142 and sold at 120, you’ve made a loss of 22 points multiplied by your £3 stake size.

Loss: 22 x £3 = £66

Example two: Apple (going short)

In this example, you might think that Apple’s stock price is going to go down, and therefore decide to short the stock. The principle is the same — if you’re right, you win, if you’re wrong, you lose — but this time, because you’ve bet the price will drop, you profit if the share price goes down.

Let’s say that the share price is now 160 and your broker offers you a buy price of 162 and a sell price of 158, meaning the spread is four.

  • Sell price = 158

  • Buy price = 162

  • Spread = 4 (difference between 142 and 138)

You think that Apple’s share price will go down, so you open a short position at £2 per point. Because you are selling to buy back later, and our margin rate for spread betting stocks is 20%, you pay 20% x (£2 x 158) = £63.20.

Outcome A: winning bet

Imagine you are right — Apple’s shares decline to a new sell price of 136 and a buy price of 140 and you decide to close your position. Because you sold at 158 and bought at 140, you’ve made a profit of 18 points multiplied by your £2 stake.

Profit: 18 x £2 = £36

Outcome B: losing bet

Imagine you were wrong and Apple’s shares rise to a sell of 190 and a buy of 194. You manage to close out before the price rises any higher, but because you sold at 158 and bought at 194, you’ve made a loss of 36 points multiplied by your £2 stake.

Loss: 36 x £2 = £72

Spread bet on over 12,000 stocks, indices, forex pairs, commodities, bonds and ETFs

Example three: UK 100 (going long)

You can also choose to spread bet on a stock market index following the same principles. In this spread betting example, let’s say that you think the FTSE 100 index is performing well and will likely rise in price. In this case, you could open a long position on our UK 100 instrument, which is a derivative based on the index.

  • Sell price = 5,789

  • Buy price = 5,790

  • Spread = 1 (difference between 5,789 and 5,790)

If your bet is correct, the index has to move only one point before you start profiting. You decide to open a buy (long) position of £5 per point. On indices our margin rate is only 0.25%, so you need to deposit only 0.25% of the value of the whole trade. 0.25% x (£5 x 5,790) = £72.37.

Outcome A: winning bet

Imagine you are right and the price moves up to a new sell price of 5,830 and buy price of 5,831. You close your position and because you bought at 5,790 and sold at 5,830, your profit is the difference (40 points) multiplied by your £5 stake.

Profit: £5 x 40 = £200

Outcome B: losing bet

Unfortunately, you got it wrong and the UK 100 drops to a new sell price of 5,760. You’re concerned the index will keep falling so decide to cut your losses and sell to close your position. As you bought at 5,790 and sold at 5,760, you’ve lost the difference of 30 points multiplied by your £5 stake.

Loss: £5 x 30 = £150

Example four: GBP/USD (going short)

You can also speculate on forex pairs. In this spread betting example, you are effectively betting on a pair of currencies — for example the UK pound and the US dollar (GBP/USD) — and how much one will rise or fall against the other. When spread betting forex​, the price is always quoted as the value of the first currency (known as the base currency) against the second currency (the quote currency) and shorting means betting the base currency will go down.

In this currency pair, if you want to bet that sterling will fall against the dollar, you are shorting the pound. Say, for example, the opening price is 1.5000. Your broker applies a two-point spread, meaning you can sell at 1.4999 or buy at 1.5001. You want to short the pound, so you sell at £5 per point. As our margin rate is only 3.33%, you need to deposit only 3.33% of the value of the whole trade.

Outcome A: winning bet

You are correct, the pound falls to 1.4950, and your broker quotes you 1.4951 to buy and 1.4949 to sell. You close your position by buying at 1.4951. You sold at 1.4999 and bought at 1.4951, so your profit is the difference (48 points) multiplied by your stake.

Profit: £5 x 48 = £240

Outcome B: losing bet

Imagine your prediction is wrong and the pound surges in value to 1.5100, so your broker quotes you 1.5099 to sell and 1.5101 to buy. Because you are concerned it will keep rising, you close your position to limit the damage, and buy at 1.5099. You sold at 1.4999 and bought at 1.5101, so your loss is the difference (102 points) multiplied by your stake.

Loss: £5 x 102 = £510

How to trade the financial markets

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What are the costs associated?

There is no commission payable for spread betting, as the cost of the trade is covered by the spread itself. However, spread betting does incur other charges, including the following:

  • Holding fees. Also known as overnight fees, a trader pays spread betting holding costs​ for shares kept overnight. For example, if any position is held after 5pm EST, when the New York Stock Exchange closes, you will be charged. The holding cost is based on the risk-free or interbank lending rate of the currency in which the instrument is denominated. For example, the UK 100 (pound sterling) is based on the Sterling Overnight Index Average (SONIA) interest rate benchmark. For buy positions, we charge 0.0082% above SONIA and for sell positions, you receive SONIA minus 0.0082%.

  • Guaranteed stop-loss orders. Because shorting can incur unlimited losses as there is no upper limit to how high a price can rise, traders can choose to pay for guaranteed stop-loss orders (GSLOs), which will automatically close your position at a pre-agreed price to prevent you losing further. You can also similarly pay for a take-profit order, which closes your account when the price hits a certain pre-agreed point.

  • Additional spread. Depending on the asset, there can be an additional spread on share spread bets when you enter and exit a trade. These are built into the prices displayed on our platform.

Read about our trading costs​ in further detail.

How to get started

  1. Open a spread betting account. You can sign up via our website and add funds to your account via bank card, bank transfer or PayPal.
  2. Alternatively, download our mobile iOS or Android app to trade on-the-go.
  3. Make sure you understand how spread betting works and the costs and risks involved.
  4. Decide if you want to buy or sell. Determine your entry and exit points based on your trading strategy. Go long and buy if you think the instrument price will rise or go short and sell if you think the price will fall.
  5. Before placing your trade, make sure you have followed risk-management guidelines as part of your strategy.
  6. Determine your position size, applying any risk-management orders, such as stop-losses and take-profits.
  7. Confirm your trade and monitor your position. If you’re making a profit, you may wish to close out when you’re ready and the target price is reached.

Why spread bet with CMC Markets?

Spread betting is our most popular product among both beginners and experienced traders. Our trading platform, educational resources and supportive client services team help our clients truly understand the markets, enabling you to realise your potential and make the most of your trading experience.

We offer spread betting on over 12,000 – shares, indices, forex, commodities, ETFs, treasuries and even our own bespoke share baskets. See our price table below for just a taster of the thousands of instruments we house on our Next Generation platform.

Instrument Min spread Margin rate Price
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We also help our clients learn to trade more effectively through our library of trading guides, platform tutorials, webinars and insight from some of the world’s top traders through our OPTO magazine.

New to trading? Set up your own risk-free demo account, which gives you £10,000 of virtual funds to practise trading with before you commit to the real thing.

FAQs

Do you pay taxes on spread bet positions?

Spread bet positions are not liable for capital gains tax or stamp duty*, as it is rated as a speculative bid rather than an investment. However, this product is only available in the UK and Ireland, whereas contracts for difference (CFDs) are available globally.

What are some other examples of derivative trading?

As well as spread betting, you can also partake in CFD trading, which involves speculating on whether an asset’s price will rise or fall, and you agree to exchange the difference in price (positive or negative) between when you open and close your position. See our similar guide on CFD trading examples.

How do costs differ for CFD trading?

CFD profits are liable to capital gains tax and trades are also subject to commission charges and transaction fees. However, CFD losses are tax deductible — unlike spread bet losses. Read our debate on spread betting vs CFD trading to weigh up the pros and cons about each product.


*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

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