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Published On: Thu, Oct 17th, 2013

What is spread betting?

Spread betting is becoming increasingly popular in the UK, as it gives people the chance to bet on a number of different outcomes rather than a simple result. While there are several betting companies offering products linked to sporting events, perhaps the most enticing opportunity surrounds stocks and shares. A spread bet is a wager that delivers returns on an incremental basis depending on accuracy, and it gives ordinary people the chance to profit from the financial markets for a relatively small initial outlay.

How does spread betting work?

Financial spread betting allows people to bet on foreign exchange rates, commodities, stocks and shares and bonds. So, if you have an opinion on long or short-term trends, and whether the value of these products will go up or down, you could be able to make some money. Of course, there is always a financial risk involved with betting, so it pays to understand fully what spread betting actually is.

The best way to explain the process of spread betting is to use a real-world example. Imagine you are about to place a spread bet on share price of a major telecommunications company. At the time of placing the bet, the current price on the stock market is 3.50, and you are fairly sure that the price will fall over the coming days. You approach a spread bet company, and they tell you that the buy/sell price is 3.52/3.48. Betting on a drop in the value means you will need to place a ‘sell’ bet at 3.48. Spread betting involves ‘points’ instead of monetary values, and how much you attribute to each point is up to you – although there are usually minimum and maximum bets. So, you decide to bet £10 per point at 3.48.

Now, if the share price fell to 3.46, that would represent a 2-point gain, as you bet on a fall in the price. Because you bet £10 per point, you would stand to gain £20 if you were to ‘cash out’ at that point. However, your prediction may have been wrong, and the price could have risen to 3.54. This represents a 6-point loss; that is the difference between the ‘sell’ price and the current market share price. This would lose you £60 if you were to cut your losses. Of course, you have the opportunity to hold your nerve in the hope that the price falls again, but that could increase your losses yet further. Had you bet on a rise in the share value at a ‘buy’ price of 3.52, however, that would give you a 2-point gain and a £20 profit.

The advantages and disadvantages

Spread betting allows you to make money on any financial instrument in any circumstances – whether the markets are depressed or buoyant. The cost of getting involved is often only a few pounds, whereas the minimum transaction values for share trading are usually out of reach for people on average incomes. Because the profits from betting are not taxed in the UK, the practice can be very lucrative. Unfortunately, the financial and commodity markets are known for their volatility, and that can leave people facing huge losses without too much warning. There is a way to cap potential losses, however, and it involves the use of a stop loss account that sets a limit on how much can be won or lost from a single bet.

Spread bets and CFDs are leveraged products. Spread betting and CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.

About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

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