What is Spread Betting?

Good morning,


The best way to understand spread betting is to compare it to trading shares in the usual fashion of buying the physical asset (not trading price derivatives):


Buying shares the usual way works like this (ignoring spreads, stamp duty and potential taxes and charges): 

• I want to buy 1000 shares in The Masked AIM Trader plc
• The share price is £2.00
• 1000*2.00 =£2,000 - I've purchased £2,000 worth of shares (or exposure)

Now, let's say that the share price rises to £2.50: 

• I sell all 1000 of my shares
• 1000*2.50 =£2500
• So, my profit =£2500-2000
• Profit =£500

A spread betting example:

In a spread bet, you place certain amount of money on the "per point" movement in an asset's price. A point isn't a standardised number and often brokers will recognise them differently, but in this case let's assume that 1 point is equal to 1p. 

The term "spread bet" suggests that there are two prices (just like in trading physical shares) - one to make an up/long bet and one to make a down/short bet, but to make the example easier to follow, we're going to ignore this for the moment and assume that you could buy and sell the bet at the same price.  

• I want to bet £10 per point on The Masked AIM Trader plc rising in price
• The current share price is £2.00
• My broker will look at this bet and say that it's the equivalent to someone buying 1000 shares in the usual fashion.
• He or she will then take a percentage of this would-be total cost (in this case 5%) and keep it in a separate account until the profits or losses are settled up
• The deposit my broker takes is therefore 5% of £2000 =£100
• I decide to close my bet at a price of £2.50 (I sell my "buy"/"long" bet)
• My profit will equal the amount of points that price has moved by (50) multiplied by my bet per point (£10)
• Profit= 50*£10.00 =£500

As in the first example, I've made a nice £500 profit and in this spread bet I also made £500 profit, but there are some really handy advantages to spread bets over trading physical shares.

Advantages of Spread Betting:

1. You don't have to pay any stamp duty.
2. You don't have to pay capital gains tax on any profits.
3. You can leverage your investments (you don't need to pay the full amount upfront).
4. You tend not to have to pay commissions to open and close positions.
5. You can open short positions much more easily than most private investors trading physical shares usually can.

Disadvantages of Spread Betting:

1. The main disadvantage with spread betting is that you've got to be prepared to fund your losses in the event that the position goes against you (a margin call).

- One way around this is to have a guaranteed stop loss in place, which will mean that your broker will guarantee you an exit price if the trade goes against you. They tend to be more expensive than a standard stop order, so expect a wider initial spread on your bet, but they don't come with the risks that usual stop losses have (being triggered significantly below the stop price, etc) and will act as a good form of risk management.

Enjoy,

The Masked AIM Trader