What is spread betting and how does it work?

In this article, we’ll explain the essentials of spread betting, including strategies, tips and examples 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.

Spread betting explained video

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, indices, commodities, stocks and treasuries. Spread betting is one of the most common ways to trade on price action over several asset classes. As it is a financial derivative product, spread betters can trade in both directions (‘buy’ or ‘sell’), and can make use of financial leverage to increase their trade exposure. With a spread betting account, you can choose between trading from home and on-the-go, as our platform is very flexible for traders of all experience levels.

How does spread betting work?

With spread betting trading in the UK, you don't buy or sell the underlying instrument (for example a physical share or raw material). 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 an asset to rise, you may open a long position (buy). Conversely, if you expect the asset to fall in value, you may 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 information on how to spread bet.

What is a spread?

The difference between the buy price and sell price is referred to as the spread. This is where a broker's commission is made, as the buy price will be slightly higher and sell price slightly lower than the underlying market's price. Say for example, GBP/USD's underlying price is trading at 1.37600 with a 1-pip spread, the buy (bid) price would be 1.37605 while the sell (offer) price would be 1.37595. Spreads can fluctuate depending on the price and volatility of an asset, as well as supply and demand.

As one of the leading providers of spread betting in the UK, we offer consistently competitive spreads. See our range of markets 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 margin trading). 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.

As an example, our margin rates for indices start at 5%. This means that you only have to deposit 5% of the asset's full value in order to open a position, allowing you to trade with 20x leverage. This is equivalent to a 20:1 leverage ratio.

Spread betting trading benefits

Many investors choose to spread bet on the financial markets as there are advantages of spread betting over buying physical assets:

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* in the UK
You can trade on indices, forex, commodities, global stocks 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

Before placing your trade, remember to make sure that you have followed risk-management guidelines as part of your strategy. There are a number of risks that come with spread betting, including the use of leverage, which can lead to margin calls or account close-outs. You are also subject to spread betting costs such as overnight fees. Read more about the risks of spread betting before entering into a potentially risky position.

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 look to potentially forecast trade outcomes.

When trading with a spread betting account, it may be good practice to outline and follow your own trading strategy template relative to your needs. Strategy templates help to 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 bet on over 10,000 financial assets

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

See our article on spread betting tips and strategies, where we cover the topic in more depth.

How to start spread betting

Open a spread betting demo account or live account. Accounts can be opened via our website or spread betting 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 spread betting 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 spread bet, 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 £10 per 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 Development 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.

Spread betting example 2: losing bet

Unfortunately, your spread betting prediction was wrong and the price of Barratt Development 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.

Learn more about spread betting for beginners and how to get started and see our detailed spread betting examples. Watch our spread betting tutorial using the Next Generation platform. If you're ready to trade, open an account now.

FAQS

How does spread betting work?

Spread betting works by traders speculating on whether a financial instrument’s price will rise or fall. Spread betters can go long (buy) if they believe the price of an asset will go up, or go short (sell) if they believe the market will start a downtrend. Learn more about spread betting.

How much do I need to start spread betting?

To start spread betting, you will need to deposit enough capital into your account to cover the margin for the asset that you have chosen. We don't have a minimum deposit requirement, so you can pay in as little funds as you would like; however, these funds will likely need to be increased as you expand your trades. Read about our spread betting margin account requirements.

Can you make money spread betting?

Spread betting can be profitable, depending on multiple factors, but it’s also possible to make a loss. Most successful traders manage to make profitable trades by following a systematic trading plan, including in-depth fundamental and technical analysis, risk-management systems and several years of applicable knowledge. Try out a spread betting demo account to practise your trading plan.

How regulated is spread betting?

Spread betting providers are regulated by the Financial Conduct Authority (FCA) in the UK. It’s compulsory for all UK spread betting providers to be FCA regulated. Find out more about regulations at CMC Markets.

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.

Disclaimer: 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.