Trading the Markets with Spread BettingOne trading vehicle that has grown exponentially due to online trading platforms is financial spread betting. So what is spread betting and how can traders use this financial tool?
- What is Spread Betting?
- Benefits of Spread Betting
- How Does Spread Betting Work?
- How is Margin Set?
- Spread Betting vs. CFDs
- Spread Betting Brokers
All investors worldwide aim to create investment opportunities which can give them the highest returns at the lowest costs. With the advent of the internet, such investment options have surged.
One trading vehicle that has grown exponentially due to online trading platforms is financial spread betting. Coming a long way and faced with near obscurity in the 1990s, the industry has provided an alternative to conventional investments.
In this article, let’s look at what spread betting is and how you can use it to open potentially lucrative positions.
What is Spread Betting?
Spread betting is a kind of speculation which involves taking a bet on market price fluctuations. It can be applied to an extensive range of financial markets. In this type of betting, the investor does not own the underlying asset but merely speculates on its price movement. Individual traders perceive it as a high-risk but potentially highly rewarding method of making tax-free gains.
A spread betting company quotes two prices, the bid and offer price. Investors then bet whether the price of the market – such as shares, commodities or currency pairs – will fall lower than the bid or rise higher than the offer. To run a position the investor provides a deposit known as ‘margin’.
Quick gains can be made from trading short-term openings as market prices oscillate. Essentially a trader is buying a market when they speculate a price will rise or selling if they think it will fall.
Benefits of Spread Betting
There are numerous benefits that come with spread betting over the conventional method of trading. The key benefits include:
Trading on margin: Spread betting is a form of margin trading, in that you don’t have to fund the full value of your position. For example, if the margin rate for a market is 10%, and you place a bet worth £300, you only need £30 from your account balance to open the position and trade. This affords investors an opportunity to do more with their capital.
Risk management: Some risk management tools are available that lock in profits and limit losses. Such tools include stop-loss orders, take-profit orders and trailing stop-loss orders. These orders help to manage your exposure by setting price limits on your position. For instance, a stop-loss order should automatically close your position if the price of the given market moves against you to a level where you want to exit your position.
Commission-free trading: This type of betting is exempt from various costs that come with trading shares with a stockbroker. The UK spread bettors don’t pay stamp duty, commission or capital gains tax because they are not buying the underlying stock. This makes spread betting an appealing and viable investment vehicle.
Traders can go short in falling markets: Investors do not have to wait on markets to ascend to make a profit. As you can use spread betting to speculate on rising or falling prices, you can make gains in bull and bear markets.
Trading in global markets: Traders get access to a wide range of financial markets such as indices, equities, currencies, and commodities like gold and crude oil.
Full-time trading: Spread betting enjoys uninterrupted access to markets throughout the trading week. Trading is available 24 hours a day, with some spread betting markets quoted even when the underlying market is closed.
How Does Spread Betting Work?
Spread betting allows investors to back their judgment in the financial markets. You can buy or sell a particular market for a given stake per point. The more right you are, the more you make gains, and vice versa.
In spread betting the ‘spread’ is the range between the selling price and the buying price. If you think the price will rise you can buy (go long); if you think the price will fall you can sell (go short).
You also need to decide your stake. This is the amount you are betting per point. For each point the market moves in or against your favor, you will make or lose this amount, as illustrated below. For example, if you buy £5 per point and the market moves favorably 5 points, you will make £25. If the market falls 10 points you’ll lose £50.
How is Margin Set?
To open a spread betting position you put down a margin deposit. This margin is calculated as a percentage of the full value of the position.
The initial margin required is established by the margin percentage for that particular market. The stake is multiplied by the opening level to give the position value. This amount is then multiplied by the margin percentage.
For example, a trader may decide to open a £2 per point position on UK 100. Say the margin percentage margin for UK 100 is 0.5% and the opening level is 7000. The initial margin can then be determined as: (£2 x 7000) x 0.5% = £70. In this case, £70 will be required as the initial margin for the position.
Trading on margin significantly enhances the potential return on your capital. However, potential losses are equally magnified if the price moves against you.
Spread Betting vs. CFDs
While with spread betting investors speculate on the price movements in financial markets, with CFD trading investors buy or sell a certain number of CFDs (Contracts for Difference) in an instrument.
Thus a CFD is a contractual agreement between a consumer and an enterprise. When the contract ends, the consumer receives the difference between the closing and opening prices of the underlying asset. If the difference is positive, profit has been realized; if the difference is negative, a loss has been made.
Nevertheless, both CFDs and spread betting present an opportunity for traders to achieve very high returns.
Similarities Between CFDs and Spread Betting
With both spread betting and CFD trading, traders can go short as well as long. You can take a long position when market prices are increasing or a short position when prices are decreasing.
In both types of trading, investors can deposit just a small percentage of the full value of the position to enter a new trade.
In spread betting, profit or loss is calculated by finding the difference between the entry and exit prices. This difference is multiplied by the stake. However, with CFD trading, the price difference is multiplied by the number of CFDs traded to determine the profit or loss.
Profits realized from spread betting are not subject to UK stamp duty or capital gains tax (CGT). Profits from CFDs are exempt from stamp duty but are subject to CGT.
Spread betting is available to customers who reside within given jurisdictions such as the UK or Ireland. CFDs are available in more jurisdictions globally.
Consumers seldom pay a separate commission when trading with spread bets – in most cases, the commission is included in the spread. In contrast, CFD prices often do not include these charges and commission is paid separately.
In most cases, CFDs are linked to physical assets such as shares, currencies, and commodities. But spread betting can take place in markets made across many activities such as election outcomes and sporting events.
Spread Betting Brokers
Every trader needs a reliable partner in investment plans. We believe that InterTrader is a cut above other brokers, offering an exceptional range of spread betting and CFD services.
InterTrader has a range of direct and reliable trading platforms giving traders the flexibility to trade rising or falling prices. Order execution is fast, with remarkable liquidity, and traders have free access to specialized trading tools and dedicated customer support.
As a broker, InterTrader is fully market-neutral, which means that it never stands to gain from client losses. Furthermore, the broker complies with internationally accepted best practice, carrying sufficient liquid capital to meet all its obligations.
InterTrader Ltd is authorized and regulated by the Gibraltar Financial Services Commission, and registered with the UK’s Financial Conduct Authority (FCA). This implies that investors’ funds are under full protection.
We believe this broker is the ultimate answer to formidable investment in spread betting as well as CFDs.
Spread betting is a viable investment option with the potential for high returns. As with CFD trading, it can provide an investor with a flexible range of trading opportunities, especially via a broker like InterTrader.
With insightful market analysis, traders can enjoy healthy profits, but the risk of major losses is also significant. The fact that profits made from spread betting are exempt from stamp duty and capital gains tax makes it attractive for UK investors, giving you a flexible, cost-efficient way to speculate across a wide variety of assets.