What Is Spread Betting?

Spread Betting enables share traders to profit from both the up and down movements of a wide variety of financial markets, including, but not limited to, stock indexes, individual shares, currencies, bonds and commodities. The difference between spread betting and most other types of financial speculation is that all profits are 100% Tax-Free, and you also don't risk a fixed amount per bet as in fixed odds betting, and there is no fixed profit or loss.

For example a high street bookmaker may well offer you 10-1 on a certain horse, so if you place £1 at those odds and win you'll receive £10 profit (plus your stake back). If you lose the bet then all you will have lost is the £1 stake.

But the profit and loss on a financial spread bet is always open because you are betting a stake, usually Pounds per Point, on the direction the market will move. For example, you may well be expecting the FTSE 100 index to rise and so decide to buy it at £1 a point using a spread bet.

Example

If you bought 'points' on the FTSE 100 index when it was at 4200, risking £1 a point and then sold it when it rallied 50 points to 4250, your profit would be £50 (50 points x £1).

But if the index moved lower and you subsequently sold your bet at 4175 to take a loss, then you'd lose £25 (-25 points x £1). This is the difference between fixed odds betting and spread betting, your ultimate profit and loss with spread betting is never known until you liquidate the bet.

However you could also bet on the index going down, by what is called selling short. If you expecting lower prices on the FTSE100 then you could sell the index short at say the current market price of 4200, and then cover this bet or buy it back at 4100

If your stake was £1 a point then your profit would be a tax-free £100 (100 points x £1). Of course your view may well be incorrect and the FTSE 100 rises, and so you decide to take your loss by buying back your down-bet or short trade at 4225, so losing 25 points multiplied by your £1 stake, a loss of £25.

Spread betting is very flexible and Spread Bet brokers offer many markets and products to trade on, all following the same principle of betting pounds per point. A further advantage to spread betting is that there are no commissions and if you are dealing in UK shares, no Stamp Duty.

Two important points you must remember are:

• If you lose your capital you will be unable to continue spread betting, or will only be able to bet very small amounts.
• And if you lose 50% of your account, you've got to make 100% back just to break even.

This is elementary mathematics but many people don't realise this kind of predicament until it hits them and their account with drastic results.