What is spread betting and how does it work? An in-depth guide

You buy or sell an amount per point of movement in the instrument you’re trading (for example, £1 per point). This is known as your stake size. A larger stake size would also result in a higher margin requirement, and greater exposure to your chosen instrument.

This means that for every point that the price of the instrument moves in your favour, you will gain multiples of your stake times the number of points by which the instrument price has moved. On the other hand, you will lose multiples of your stake for every point the price moves against you. Please note that losses are based on the full notional value of the position, so you may lose more than the initial margin required to open the trade.

See our spread betting examples for more information.

The difference between the buy (bid) price and sell (ask) price is referred to as the spread in trading. This is where a broker's commission is made, as the buy price will be slightly higher and the sell price slightly lower than the underlying market price.

The spread is a key cost for traders to consider. Depending on how expensive, volatile, and liquid an instrument is, the spread can fluctuate, along with its price and the trading volume.

Say for example, Apple is trading at a buy (bid) price of 141.10 and a sell (ask) price of 141.14, the spread would be 4.0. If your stake was £1 per point, you would pay £4 in spread.

Many spread betting instruments don’t have a fixed duration, and can be closed at any time during the instrument’s trading hours. At CMC Markets, these are called ‘cash’ instruments. How long you hold your spread betting position largely depends on your trading strategy, the market you’re trading, and the type of spread bet you open (‘cash’ or ‘forward’).

A key part of your trading strategy is managing your risk, and so where you place your stop-loss and take-profit order levels, along with the volatility of the instrument you’re trading, will be important factors in determining the duration of your spread bet. Trading strategies range from scalping, which is a very short-term form of trading, through to a much longer-term style of trading. However, spread betting is often considered as short term, compared with traditional longer-term investing, where a stock portfolio, for example, may be held for several years.

The type of trade you open is also an important consideration. Spread bets on ‘cash’ instruments can normally^‡ be kept open for as long as you want to hold them – there is a daily overnight holding cost which will be applied to your account as long as you keep the bet open. Spread bets on ‘forward’ instruments, on the other hand, have a set expiry date, usually within the next few months. Holding costs are not applied to these type of spread bets. Read more about futures and spread betting on forward instruments

The bet size is another term for the amount of money you want to bet per point of movement on the instrument you’re trading. The minimum bet size – or stake – for indices, forex, and commodities is £0.10 per point. The bigger the stake, the greater your exposure to the instrument and market you're trading.

You can choose your bet size, or stake, as long as it meets the minimum requirement for the instrument you’re trading. Your profit or loss is calculated as the difference between the opening and closing price of the instrument, multiplied by the value of your stake.

When you spread bet, you put down an initial deposit – the margin – to open a position. The initial funding required to open the position is a percentage of the value of the trade. If the price of the instrument you trade goes up, the margin required will increase; if the price falls, the margin will decrease.

Should your open position start to incur losses not covered by the initial deposit, you’ll get a margin call notification, which means you’ll need to add funds to your trading account, or risk your position being closed

The margin rate varies depending on the market you trade, and ranges from 3.34% of the trade size on forex, to 20% for shares, shares baskets and ETFs. View our margin rates

Spread betting is a leveraged product, which allows you to get full exposure to the market without having to pay the total underlying market cost upfront. Instead, you only need to deposit a percentage (or margin) of the full value of the trade to open a position. Trading with leverage magnifies your returns and losses, as they’re based on the full value of the trade.

Common margin rates for indices start at 5%. This means that you only have to deposit 5% of the instrument's full value to open a position. This is equivalent to a 20:1 leverage ratio.

It’s important to keep up to date with the latest economic data and news, because real-world events can often influence market prices. As an example, let's look at the UK government’s help to buy housing scheme.

Many believed this scheme would boost UK homebuilders' profitability. Let's say you agreed and decided to place a buy spread bet on Barratt Developments at £10 per point just before the market closed.

In our example, Barratt Developments is trading at 255 / 256 (where 255 is the sell price and 256 is the buy price). The spread is 1 point.

Let's assume that you opened a long position at £10 per point because you thought the price of Barratt Developments would go up. For every point that Barratt’s share price moved up or down, you would have netted a profit or loss multiplied by your stake amount.

Your prediction was correct and Barratt Developments’ stock then rose to 306 / 307. You decide to close your buy bet by selling at 306 (the current sell price).

The price has moved 50 points (306 sell price - 256 initial buy price) in your favour. Multiply this by your stake of £10 to calculate your profit, which is £500.

Unfortunately, your prediction was wrong, and the price of Barratt Developments’ stock dropped over the next month to 206 / 207. You feel that the price is likely to continue dropping, so to limit your losses you decide to sell at 206 (the current sell price) to close the bet.

The price has moved 50 points (256 – 206) against you. Multiply this by your stake of £10 to calculate your loss, which is £500.

In this straightforward example, we haven’t placed any stop-loss orders, including guaranteed stop losses, which could have limited the loss.

Overnight holding costs apply to ‘cash’ positions held overnight, and could reduce the overall profit, or increase an overall loss, depending on market movement.

A spread betting strategy is a predetermined plan that helps you to define your market entry and exit points, and any accompanying risk-management conditions, such as stop-losses. When utilising a trading plan as part of your wider trading strategy, you aim to create a process in which you can monitor and aim to forecast trade outcomes.

A trading strategy template can help you to define a set of rules to follow for every trade, helping to remove emotions, or irrational responses. This keeps consistency within your trades and can help improve your trading mindset. Learn more about trading strategies

Traders utilise a variety of different methods and strategies suited to their own trading style. There are, however, some common tips to bear in mind:

Our spread betting account

More spread betting examples

How to spread bet using leverage

Our range of markets

The differences between spread betting and CFD trading