Spread Betting Explained

Spread Betting provides ordinary retail investors with a simple and tax-free alternative to trading shares, currencies, commodities, and other financial markets. You can make a profit from rising or falling prices, and you pay no capital gains tax on your profits. You can also trade on margin - which means that you only need to deposit a small percentage of the value of your trade.

No Commissions
There are no broker commissions to pay with Spread Betting. Spread Betting companies make their money from the difference between the spread.

A Spread Bet Example
Let's say that your Spread Betting company is quoting a price of 5744-5745 for the FTSE 100 index. This means that you can buy at 5745, and sell at 5744.

Imagine if you are bullish so you decide to buy at 5745, with a stake of 10 pounds per point.

Now suppose during the day that the FTSE increases, and the quote is now 5774-5775. You decide to take your profit so you sell at 5774. The difference between your buying price and selling price is 29 points (5745 - 5774). The size of your bet was 10 pounds per point, so your profit on the trade was 290 pounds (29 x 10). Note that this profit is tax-free.

If however the FTSE had fallen in price you would had made a loss on the trade. For example if the FTSE had fallen to 5720-7221 you would have to sell at 5720, meaning you would have lost 250 pounds on the trade (25 points x 10 pounds).

Why Spread Bet?
There are many advantages of Spread Betting over conventional financial trading. The profits on Spread Betting are tax-free, there is no commission or stamp duty, and you can profit on rising and falling markets. You can also use leverage which means that you increase your profits and losses. You can hedge currency exposure.

What are the risks?
Because Spread Betting is a leveraged product you can risk more than your original deposit. Never put too much of your money in one investment.

How does a Spread Betting Company Make Money?
A Spread Betting company doesn't charge commission, but it makes its money from the spread that you trade. Typically the company will hedge its exposure to your bets in the market. This means that if you make money the spread betting company can also make money too.

Will my Spread Betting Company close my account if I am winning?
Spread Betting companies are able to hedge their exposure into the financial markets. So even if you are a consistent winner the Spread Betting company can still make a profit. Most companies will aggregate all the spread bets from all of their clients. Depending on their risk management tolerances, the traders will hedge when their exposure gets too large in a certain market. Because of this, your spread betting company will be very happy to see you win, because it has collected its profit from the spread.