Spread betting is a financial derivative that allows traders to profit, or incur losses, relative to movements in the financial markets. Traders never own the underlying asset, so financial spread betting offers advantages over traditional forms of trading.
- What is spread?
On any market a broker will provide a buy price and a sell price around the underlying market price. The difference between the buy and sell price is known as the spread.
For example, the Germany 30 (DAX), currently has a buy price of 10156 points and a sell price of 10155 points. The difference between these prices (10156 – 10155 = 1) is the spread.
Spread is also one of the costs of trading. The tighter a spread is, all things being equal, the lower the cost of trading.
- How does a financial spread bet work?
Financial spread betting comes down to predicting which way a market will move in. If a trader believes a security will increase in value and goes‘long’, they will profit in line with each point increase above the buy price. Similarly, if they ‘go short’ and the market drops in value, they begin to profit in line with every point by which the market falls.
Using the Germany 30 example above, a trader speculates the market value will decrease and opts to ‘go short’ (sell) at a stake of £100 a point. As predicted, the Germany 30 falls by 10 points to a buy price of 10146 and a sell price of 10145. At this point, the trader decides to close their trade and take the profit. The trader opened trading at 10155 and closed at 10146, giving a difference of 9 points. Multiplied by the stake of £100, this returns a profit of £900.
If the Germany 30 moved against the trader’s position, a loss would be incurred equivalent to each point change in that direction.
- How does spread betting differ from traditional forms of trading?
Going Short: When a trader owns the underlying asset they only profit when the market is rising. With a financial spread bet, traders can profit (or incur losses) when the market is falling.
Leveraged: In financial spread betting, a trader doesn’t need to deposit the entire notional value of their bet. Instead a margin of this value is deposited instead. This massively increases total exposure to the markets(and with it potential profits or losses).
Tax-free: Unlike traditional forms of trading, financial spread bets are currently free from UK Stamp Duty and UK Capital Gains Tax. Tax laws may change and this may be dependent on individual circumstances.
Risk Warning: Financial spread bets are leveraged products, which means you could lose more than your deposits. If you’re hazy on what that means, you shouldn’t trade.