What is spread betting
and how does it work?
In this article, we’ll cover the essentials of spread betting, including strategies, tips and an example of a spread bet. This article should guide you towards understanding if spread betting is a suitable trading method for you. Watch the video below to get started.
What is spread betting?
Spread betting is a tax-efficient* way of speculating on the price movement of thousands of global financial instruments, including forex, stock indices, cryptocurrencies, commodities, shares and treasuries. Spread betting is one of the most common ways to trade on price movements over several asset classes in the UK and Ireland. Spread betters can trade in both directions (‘buy’ or ‘sell’), and can make use of financial leverage to increase their trade exposure.
How does spread betting work?
With spread betting trading, you don't buy or sell the underlying instrument (for example a physical share or commodity). Instead, you place a spread bet based on whether you expect the price of an instrument to go up or down. If you expect the value of a share or commodity to rise, you would open a long position (buy). Conversely, if you expect the share or commodity to fall in value, you would take a short position (sell). You will make a profit or loss based on whether or not the market moves in your chosen direction.
What is a spread bet stake?
With spread betting, you buy or sell a pre-determined amount per point of movement for the instrument you are trading, such as £5 per point. This is known as your spread bet 'stake' size. 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 in your favour. On the other hand, you will lose multiples of your stake for every point the price moves against you. Please note that with spread betting, losses are based on the full value of the position. See our spread betting examples for more on how to spread bet.
What is a spread?
The difference between the buy price and sell price is referred to as the spread. As one of the leading providers of spread betting in the UK, we offer consistently competitive spreads. See our range of markets page for more information about our spreads.
What is margin or leverage when spread betting?
Spread betting is a leveraged product, which means you only need to deposit a small percentage of the full value of the spread bet in order to open a position (also called 'trading on margin'). While margined (or leveraged) trading allows you to magnify your returns, losses will also be magnified as they are based on the full value of the position.
Learn more about margined trading
Spread betting trading benefits
Many investors choose to spread bet on the financial markets as there are advantages of spreading betting over buying physical shares:
- You can sell (go short or short sell) if you think the price of an instrument is going to fall
- You can trade on margin, so you only need to deposit a small percentage of the overall value of the trade to open your position. Remember, this means that your potential return on investment is magnified, as are your potential losses.
- Spread betting profits are tax-free*
- You can trade on indices, forex, cryptocurrencies, commodities, global shares and treasuries
- There is no separate commission charge to pay on spread bets
- You get access to 24-hour markets
- There is no stamp duty* to pay
Remember, before placing your trade; make sure you have followed risk-management guidelines as part of your strategy.
Spread betting strategies
A spread-betting strategy is a pre-determined plan that helps you to define your market entry and exit points, and 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 forecast trade outcomes.
When trading with a spread betting account, it’s best practice to outline and follow your own trading strategy template relative to your needs. Strategy templates define a set of rules you should follow for every trade, helping you to remove emotions and irrational responses from your trading strategy. This helps to keep consistency within your trades, and can help improve your trading mindset. Visit our article on creating a trading strategy template, where you can follow an example to help define your strategy
Spread betting tips
Every trader utilises different methods and strategies to suit their trading style. There are, however, some common spread betting tips a trader can utilise in order to maximise their trading potential:
- Create a relevant trading plan and stick to it
- Keep emotions aside from your trading
- Evaluate market analysts’ news and write-ups as part of your analysis
- Be aware of the macro environment through news outlets
- Avoid recommendations and tips from unreliable sources, such as internet forums
- Cut your losses short and let your profits run
- Test new strategies on your spread betting demo account
How to start spread betting in the UK
- Open a spread betting demo or live account. Accounts can be opened via our website or mobile app. Deposit funds if you have chosen to open a live account.
- Research financial instruments to trade. Browse our news and analysis section, and check the insights, market calendar and chart forum platform modules. Live account holders can also access Reuters news and Morningstar fundamental analysis for inspiration.
- Go long and ’buy’ or go short and ’sell’. Go ahead and ’buy’ the asset if you think the price will rise, or ’sell’ the asset if you think the price will fall.
- Follow your market entry and exit strategy. Based on your trading plan, enter the market at a defined time, and use your risk mitigation strategies like stop-loss orders.
- Enter your position size and place your trade. When placing a trade, be aware of the full trade value, and don’t forget to add stop-loss and take-profit orders.
- Monitor your trade. Keep track of the open trade on your mobile or PC, and close the position as defined in your trading plan.
Spread betting examples
It's a good idea to keep up to date with current affairs and news because real-world events often influence market prices. As an example, let's look at the UK government’s help to buy housing scheme.
Many believed that this scheme would boost UK home builders' 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.
Let's say that Barratt Developments was trading at 255 / 256 (where 255 is the sell price and 256 is the buy price). In this example the spread is 1.
Let's assume that you opened a long position at £10per point because you thought the price of Barratt Developments would go up. For every point that Barratts' share price moved up or down, you would have netted a profit or loss multiplied by your stake amount.
Spread betting example 1: winning bet
Let's say your spread betting prediction was correct and Barratt Developments' shares then rose to 346 / 347. You decide to close your buy bet by selling at 346 (the current sell price).
The price has moved 90 points (346sell price – 256 initial buy price) in your favour. Multiply this by your stake of £10 to calculate your profit, which is £900.
Spread betting example 2: losing bet
Unfortunately, your spread betting prediction was wrong and the price of Barratt Developments' shares 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.
See our detailed spread betting examples.
Learn more about spread betting and how to get started, and see our detailed spread betting examples. If you're ready to trade, open an account now.
Losses above are based on the full value of the position. Past performance is not indicative of future performance.
^Prices are taken from our platform. Our prices may not be identical to prices for similar financial instruments in the underlying market.
*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.
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