Definition of spread betting:
Spread betting is the ability to bet on an outcome that is unknown and is practiced in both finance and sports. The spread betting company will use in house techniques and strategies to quote two prices, which is the spread and the prices are called the bid and offer price. Betting then commences on whether the ultimate outcome with be above or below the spread. The profit or loss then depends on how right or wrong the original bet was, so if it goes the right way you are i profit and if it goes the opposite way you are in loss.
Financial spread betting gives investors leveraged bets on stock market movements, where they can make money as a stock loses value (short) as well as gains in value.
Traditional trading of the stock market means you have to buy and sell the shares and only profit when the stock goes up in value. Spread betting allows speculation on whether prices will go up or down.
In the UK it is regulated by the FSA rather than the gambling commission, but in effect you are gambling on an unknown outcome and the swings can be huge. In reality this means that while you can make huge amount of money in a short period of time, you can also lose big too and this is where the risk factor comes in. You can in effect lose you initial stake and a lot more money, so you have to be prepared for this to happen or don’t do it. Losses can be limited as it isn’t a black hole if you bet the wrong way by putting a stop loss on your position.
Note: If you lose significant money, you can’t offset those losses against tax.
Profit example :
Your instinct is that the FTSE250 is going to rise over the day
The spread betting company offers the FTSE250 price of 9700-9712 (9700 is the bid price and 9712 is the offer price)
You decide to buy at the offer price of 9712 betting £10 a point, where each point raised is worth 1, so it would be 20 points from a rise of 9712 to 9732
The market goes in favour and you sell at 9752
The profit on this trade is no of points moved (40) x your stake of £10 per point
£10 x 40 = £400 tax free profit
Loss Example:
Your instinct is that the FTSE250 is going to rise over the day
The spread betting company offers the FTSE250 price of 9700-9712 (9700 is the bid price and 9712 is the offer price)
You decide to buy at the offer price of 9712 betting £10 a point
The market drops and you sell at 9690
The loss on this trade is no of points moved (22) x your stake of £10 per point
£10 x 22 = £220 loss