Spread Betting – Combining Betting with Online Trading
If you're like most investors, you like investment opportunities that are quick, safe, and replicable time and time again. But you also know that when it comes to investing, there is no fast and secure way to do so. However, that's not to say there are no quick be it not so safe ways to make money, such as spread betting.
Spread betting is a speculative tool used to hold a position on the market's direction or financial instrument. And unlike buying shares, you don't own the underlying assets or have to pay vast amounts to hold sizable positions. So should you go to the best spread betting brokers and try out your luck? Well, not until you read this piece.
What is Spread Betting?
Spread betting is the practice of speculating what direction the market will turn and placing a bet to benefit from the movement. You never get to own the assets you're speculating on but instead get to revenge on the marginal shifts while getting to open positions for a fraction of the price it would take to buy the shares.
Furthermore, because spread betting is technically betting and not trading, you don't have to pay capital gains tax and stamp duty as you would on other forms of trading. This means if you implement the right betting strategy, you stand to make more than in most other trading strategies.
Spread bets are also very flexible regarding instruments you can trade or bet on. It allows you to place long bets when you think a share will go up or sell bets when you're betting on them dropping.
How Does it Work?
To better understand how spread betting works, you first have to understand these few concepts:
- Trade direction: this can either be positive or negative/ up or down. A positive or upward movement is called an up bet, and a negative or downward move is a down bet.
- The spread: this is the difference between a bet's buying and selling price or the profit or loss you will make.
- Bet size: is the amount you use to bet on a specific outcome.
- Point: this is the minimum movement up and down, representing where the betting range starts. It is not a set constant, and you may find it changes broke to broker.
To place a trade using the spread betting strategy, you need to define your bet size, which you will then multiply by the number of points movement in your favour to get your total earnings or loss. For instance, let's say you want to place an up bet on company's X shares. Let's also say each share is £100, and your broker's minimum point movement is £1.
If you decide to bet £10 per point, and after a day or two of placing your bet company's X shares rise to £105. In this case, you have made a 5-point profit on your bet. And because you were betting on £10 per point, your broker will multiply it by the 5-point movement, which will net you £50.
Furthermore, unlike other forms of trading, you don't have to pay any tax on the £50 profit you just made. You also don't have to pay stamp duty or commission when opening and closing the bet. In addition, one of the most significant benefits of spread betting is that you only require a fraction of what buying the shares would cost you. In the above example, you would need to buy £1000 worth of shares in the same company to make the same profit. But when spread betting, it might be a 5% deposit of the principal amount. However, it depends on the broker you're using.
Sometimes the lines between trading and betting can get skewed, and no other trading strategy makes that more apparent than spread betting. However, this might not at all be a bad thing. Of course, it has its pros and cons but so does every other trading strategy. So if you have a keen eye and a good sense of market movements, we say go for it and try your hand out on spreading betting. But remember, refrain from getting carried away because betting can be a slippery slope.