What Is Spread Betting?

spread bettingWhen the word ‘betting’ is included in something, it’s easy to presume that the activity includes some sort of wagering on an event. Whilst that it technically true in the world of spread betting, is not an activity similar to the sort of thing that most punters will be used to when it comes to the likes of football, tennis and golf. Instead, spread betting is wagering money on the movements of various different markets.  This is generally associated with financial markets but can also be used on sports betting markets.

As with most financial dealings, you don’t actually take any ownership of the underlying asset that you’re betting on, instead simply trying to figure out whether the price of said asset will rise or fall. The likes of commodities, shares, indices and the foreign exchange are commonly bet on by those that engage in spread betting, but the word ‘betting’ shouldn’t give you the impression that you’re placing a bet in a real sense.  It isn’t even regulated in the same way as most other forms of gambling.

Spread Betting Explained

legal explanationFinancial spread betting was first created in 1974, but the modern version of the market allows for bets on over 17,000 different things. The nature of it as a strategy allows punters a much wider range of opportunities than they’d find in the more traditional and common ‘buy-and-hold’ investments, which is why they’re so popular. There’s also the fact that tax works differently in the world of spread betting.

Spread betting involves bets that are placed on whether a certain asset will gain or lose value. It means that people engaging in it can bet on the underlying market price of the asset in question but don’t need to actually take ownership of it. As with people who work in the stock market, spread bettors are offered a price at which they can buy and another price at which they can sell, with the difference between these being the spread.

Spread betting brokers make profit from the spread in question, which means that they can be made without paying a commission. If you get involved in spread betting, you’re placing bets on the direction that the financial market that you’re betting on will take. It was created in order to allow people to be involved in the gold market at a time when buying actual gold was prohibitively difficult to do.

Spread Betting Versus Stock Market Trading

Business StrategyIn order to better explain spread betting, it’s worth considering the difference between it and trading on the stock market. Imagine for a second that you’re a stock broker and you’ve bought 1,000 shares of Tesco at £193.00 per share. That requires an outlay of £193,000, giving you £2,000 profit when you manage to sell the shares for £195.00 per share at a later time.

On top of that, you’ll have paid commission to enter and then exit the stock market. In addition, capital gains tax and even stamp duty may be applicable to your profit, further reducing how much money you’ve made from your trade. In spread betting, meanwhile, you’ve made a bid-offer spread to buy at £193.00 and decided the amount per point is a one pence change, either up or down, in the Tesco shares.

With an up bet value of £10 per point, you stand to make £2,000 if the price of Tesco increases from £193.00 to £195.00, just as in our stock market example, but this time you don’t have to pay any commission and there’s no stamp duty or capital gains tax to pay either. The downside is that the bid-offer spread is likely to be much wider than it would be in other markets, which is what can cause people problems.

Spread betting asks people to pay a deposit amount to take part in it, rather than the full amount of the trade. This means that someone trading on Tesco in the stock market would have had to have an initial outlay of £193,000, compared to, say, a 5% deposit for the spread bet, which equates to £9,650. The market can go down as well as up, of course, so you can lose money just as quickly as you can make it.

Sports Spread Betting

Sports EquipmentNow we understand traditional spread betting we can look at the newer format of sports spread betting.  Let’s take a football match between Arsenal and Everton, you think Arsenal will win.  In standard betting you would back Arsenal at fixed odds and you will know your exact potential loses and winnings before the event takes place.  With spread betting, instead you take a position on Arsenal.

Instead of getting a fixed payout your gains or loses differ depending on the result.  Let’s say you stake £100 on Arsenal with a price quoted at 15.0, if they win you might get 30 points, a draw is worth 10 points and a loss is worth 0 points.  Here are the potential outcomes:

  • Arsenal win, you will win 30-15 x 100 – £1500
  • Arsenal draw, you will lose 10-15 x 100 = -£500
  • Arsenal lose, you will lose 0-15 x 100 = -£1500

There is an obvious attraction here on the basis that you can win or lose different amounts depending on the outcome, although one thing that should stand is you can lose many times your stake (unlike a fixed odds traditional bet).  It is possible to end up in debt to the spread betting company if your position means you lose more than you have deposited in the site – this is why it is very dangerous to the uninitiated.

The example above is basic but you can take a position on almost any statistic.  Say you think there will be more than 6 shots on target in a match then you can ‘buy’ at ‘6’ for say £100.  At the end of the match you can win £100 for every shot on target over 6 but also lose £100 for each shot if it ends up under 6.

Most sports spread betting companies have demo accounts, if you really want to try this give it a go on a demo account first until you get the hang of how it works and the risks involved.

It’s Not Risk-Free

losing betSpread betting is not without risks. A survey by the Financial Conduct Authority in 2016 discovered that 82% of spread betting customers had lost money on products known as Contracts For Difference, or CFDs. A figure of about 80% of losses in spread betting has long been the case, which is why it’s dangerous to think of spread betting as an activity equatable to something like betting on football or using slot machines.

It’s always worth remembering that the best traders are paid huge amounts of money because they are very, very good at what they do. It’s little wonder, therefore, that average punters engaging in spread betting are not likely to make a profit in the long-term. Markets can turn quickly, meaning that amateur spread bettors can quickly find themselves in large amounts of debt after a small initial outlay.

The Appeal Of Spread Betting

markets rising and falling rollercoasterThe main draw of spread betting is that different rules apply to it when compared to something like trading on the stock market. The fact that you don’t have to pay commission on your moves is of huge importance to people that want to make as much profit as possible, whilst the lack of needing to pay tax is also a big factor. As with normal betting, no tax means that you will take home the majority of your profit.

The other thing that appeals to some is the fact that you can trade on both rising and falling markets. If you think that the price of a given market is going to go up then you can ‘go long’, whilst if you’re convinced it will go down then you ‘go short’. This offers a decent range of options, especially when placed alongside the large range of markets and the fact that you only need a relatively small deposit to get involved in it.

It’s Controlled By The FCA

fcaThe fact that spread betting is referred to as being a ‘bet’ doesn’t mean that control of the market falls under the auspices of the United Kingdom Gambling Commission. Instead, it is the Financial Conduct Authority that is responsible for the regulation of the industry. This means that you do not get the protections from the UKGC that you would get from a bookmaker or online casino if you were to encounter any problems.

That being said, you are still offered a degree of protection by the FCA. The Investors Compensation Scheme was brought in in 1986 and is in place to bail-out any private investors that are left short by an authorised firm being unable to meet any of its liabilities. It only covers debts relating to investment businesses, but is a key factor in why it’s important to ensure that you’re only spread betting with authorised firms.