Spread Betting Guide
The most commonly traded spread bets are, typically, those relating to the stock market indices, such as the FTSE 100 in the UK or the Dow Jones and Nasdaq in the US.
By way of an example, let us assume that the FTSE 100 starts the day at the 6,300 level:
Your spread bet broker is neutral about the FTSE's prospects and forecasts that it will close between 6,300 - 6,305 at the end of the day (this is known as the 'quoted spread').
You are expecting some good company results and think the FTSE is likely to finish up around the 6,350 mark at the 4:30 close of business - so you choose to 'buy' the FTSE and bet £10 on every point it finishes above the quoted spread.
The results come in, they are not quite as good as you predicted but, none-the-less, the FTSE closes at 6,325.
You win (6,325 - 6,305) x £10 = £200. A good result!
However, spread betting is certainly not limited to the stock market indices. It is commonly used for betting on individual stocks & shares, currencies, commodities, sporting fixtures and even major political events. And at its core is the adage that 'the more right you are, the more you win'.
Spread betting is certainly not limited to the stock market indices. It is now commonly used as the preferred method of speculating on a wide variety of events - two of the most established markets being financial spread betting and sporting events.
Financial spread betting covers a wide variety of markets:
Stock market indices & sectors - the FTSE, Dow Jones, Nasdaq, DAX, Nikkei and many other indices, plus a wide variety of industry sectors (e.g. retail or pharmaceuticals).
Individual shares & bonds - choose from thousands of individual equities & bonds from the UK, US, Europe and around the world.
Currencies & interest rates - all the world's major currencies and bank interest rates.
Commodities - speculate on the price of oil, precious metals, pork bellies or orange juice.
The sporting spread bet sector includes all manner and combination of bets from every major sporting fixture:
Football - bet on the statistics for the full season or individual games - from overall winners to total goals and from number of bookings to 'shirt supremacy'!
Horse racing - all the major fixtures and a host of combination bets.
Cricket, rugby, golf, tennis, snooker, dog racing - all forms of combination bet on the statistics surrounding the results.
Most of the spread bet brokers in the UK differ slightly in their services, depending upon their technology, the markets they cover and their ideas of what constitutes good customer service.
However, all require that you open an account before you can place a trade. This involves the completion and return of a number of forms - with much of the process governed by the current money laundering regulations.
Most brokers then offer the choice of either a deposit or a credit account:
A deposit account requires that you place funds into your account before making a trade. The size of deposit required varies between different brokers and across different bets, but you will typically need between 5-10% the value of the overall trade. This deposit is sometimes known as the 'margin requirement' or 'notional trading requirement'.
A credit account allows you to place trades up to a pre-specified value, without needing to deposit funds into your account. Your credit limit is determined by affordability and a credit check on your finances - and as long as the combined 'margin requirement' for all your open trades falls within this credit limit you won't need to deposit any further monies into your account.
Once your account is set up, most online services are quite intuitive and allow you to 'point and click' to select the trade and place your order. The only question remaining is what type of order to place:
Market orders. A market order is an instruction to buy or sell at the best available current price. E.g. if you think that the price of the FTSE 100 is going to rise above the quoted spread of 6,005 - 6,010 you will place a 'buy' order; and if you think the price is going to fall below this spread you will place a 'sell' order.
A limit order. A limit order is an instruction for your broker to buy or sell a trade at a price of your choosing if the market should rise or fall to that level.
For example, you may have 'bought' the FTSE 100 at 6,005 - 6,010 but want to close the bet if the market rises to 6,020 - 6,025. So you set a limit order to sell at 6,020 and leave the broker to close your position automatically at this level.
A contingent order. A complex variation on a limit order that allows you to specify instructions to buy or sell stock only when certain conditions are met. The most common variety is the stop loss order - an instruction to close a position if the price moves against you beyond a specified level.
A guaranteed stop loss order. It does exactly what it says on the tin - it's a stop loss order that is guaranteed to close at the specified price. Whereas an ordinary stop loss might not execute if the price jumps over your limit overnight, the guaranteed order will execute exactly at your price. Although you should note that there is usually a small additional cost for these orders - either in the form of a charge or a widened spread.
There are many ways to speculate on, or invest in, the fortunes of the financial markets - through individual shares, collective investment funds or more specialist derivative products. Spread betting offers a number of advantages over some of the more conventional investments:
Going 'short'. Unlike many other investments, spread betting is not limited to making profits in a rising market - it allows you to bet on the markets going up, down or even staying flat.
Leverage. Spread betting allows you to bet 'on margin', i.e. you only need to put down a small deposit to place the bet - typically 5-10% the total value of the bet - meaning that you could win many times your original stake. Although please remember that you could just as easily lose much more than your original bet!
Tax free winnings. Spread betting is currently classed as gambling by the tax office - and all winnings are free of capital gains tax.
No commission. Spread betting firms make their money from the spread between the 'bid' and 'ask' prices and do not charge dealing commissions.
Small stakes. Generally minimum stakes are low - typically £0.50-£2 per point - allowing you to place whatever size bet suits your budget.
This combination of flexibility, leverage and low transaction costs makes spread betting an attractive alternative to the more traditional investment markets - but it's not for everyone and you should be wary of the risks!
Unlike with a lot of investment products, the charging structure for spread betting is relatively straightforward and simple to understand:
Charges. There are typically no dealing commissions, management fees or random periodic administration fees.
Capital Gains Tax. Crucially, there is no capital gains tax to pay on any profits that you might make from your trading activities over the year.
Betting Tax. More good news - the old betting tax regime was abolished in 2001 and there is no longer any tax or duty at the point of placing you bet. (Under the old regime punters had to pay a 9% tax on their stake - under the new regime, the bookmaker is charged 15% on their gross profits.)
Other Duties. Finally, whereas share investment incurs 0.5% Stamp Duty on all purchases and a £1 PTM (Panel of Takeovers & Mergers) fee on all transactions over £10,000 - spread betting is again free.
So what's the catch and how do the spread betting companies make their money?
The 'Spread'. All the costs associated with spread betting are included in the spread - the difference between the bid and the offer price - including all the business admin costs and the costs associated with 'laying off' the risk on any open positions.
What this means is that the wider the spread on any trade, the more you are paying for that trade. So it is always worth comparing the different brokers and finding the best one for the markets in which you are interested.
