Spread betting is a mode of trading on price movements of different types of security. Just as in stock market trading, in spread betting, a company quotes two prices, the offer and bid prices. Investors use the prices quoted to speculate whether the asset's price will rise or fall.
Unlike stock market trading where investors actually own the stock assets , investors in spread betting do not get to own the underlying asset. With spread betting you stake a certain amount of money which is gauged per point movement of the bid and offer prices. If the product's price moves in favor of your bet, you gain multiples of your stake per point movement. Likewise you lose multiples of your stake if the price moves against you.
Charles K. McNeil is believed to be the inventor of spread betting. He was a Mathematics teacher/ securities analyst who lived in Connecticut. He later converted to a bookmaker in the 1940s. Despite being coined in the 40s, spread betting gained popularity in the 1970s and 80s and spilled into the United Kingdom as well.
What is a Spread in Spread Betting
A spread betting company typically quotes two prices, the bid price (buy price) and the offer price (sell price). The difference between these two prices is what is referred to as a spread.
Example: Buying Company X
Assume company X quotes a bid price of £100 and an offer price of £103 for AB stock. The spread will be £3. If you speculate that the price of the stock will rise above £100, you could bet £5 (stake) for every British pound that AB stock ascends above £100. Therefore, if the price of the AB stock rose to £130 in a week's time, you would receive £150 as the price moved up 30 points. However, if the price of the AB stock dropped to £70 (dropped by 30 points), you would end up losing £150.
Advantages of Spread Betting
Tax-free profits. In the United Kingdom spread bets are exempt from the CGT (capital gains tax).
Ability to go both long (buying) and short (selling). The investor in spread betting does not actually own the underlying asset, so they are able to capitalize on both rising and falling markets. This means you could place a spread bet selling the product, then buy it back for a lower price later. This is if you contemplate that the price is going to fall. Still if you go short (sell the product) and the price rises, you might lose money.
Trading commission-free. Unlike with stock market trading, where there are many costs when you trade shares with a stock broker, spread betting is exempt from many of these costs. This is possible since the spread betting company tends to benefit from the spread.
Global markets access. With one online account an investor is able to bet on the price movements of different assets worldwide (international shares, treasuries, currencies, commodities, indices). This global access also enables an investor to speculate on new previously inaccessible markets and at a low cost as well.
Trading using margin. With spread betting you are allowed to bet using margin. This creates the potential to do more with your capital. You could place more bets, open more and bigger positions which you'd be unable to if you had funded the full value of the bet. For example, if a product has a margin rate of 10%, and you wanted to place a bet of £100, you'd only have to stake £10 to place the bet.
Stamp duty free. One does not buy the underlying asset when spread betting. You bet on the movement in price of the product. This means you don't have to pay the stamp duty when you spread bet.
Risks of Spread Betting
In comparison to other forms of investments, spread betting carries a higher risk level to your capital. Hence it's recommended that all investors conduct exhaustive research or seek independent professional counsel before venturing into it.
With spread betting you risk losing more than your initial deposit. An investor uses position margin to place a bet. However the total loss or profit potential is greater than the position margin that you pay. Why's that? If you place a bet worth £100, with a position margin rate of 5%, you only need to put forward £5 to place the bet. If the price of the asset moves against you by 50%, you will lose £50 (calculated from the bet worth £100). This is ten times the position margin put forward.
Holding costs. These costs depend on the positions you hold, and how long you are holding them. Holding costs may be incurred daily by the betting company. So if you hold positions for long, the costs might exceed the profits leading to losses being incurred.
Account closure. If there aren't sufficient funds in your account to cover the total margin requirements, you risk some or all of your positions being closed out.
Managing Risk In spread Betting
Spread betting entails use of high leverage. This incurs the possibility of huge risks and losses. However there are some tools that could be used to limit these losses.
Standard Stop Loss Orders. A stop loss order reduces risk and loss by automatically closing out a losing bet once the trade exceeds a set price level. With a standard stop loss order the losing trade will be closed out at the best available price once a set price is surpassed. If the market is in a high volatility state, the trade might be closed out at a worse level than that of your stop price.
Guaranteed Stop Loss Orders. This is another form of a stop loss order. It assures to close your trade at your exact stop trigger value. The only downside to this form of stop loss order is that it's not free. Plus you'll have to pay your broker an additional charge.
Sports Spread Betting
Unlike with the fixed-odds betting in sports, where you bet on a simple win, draw or lose scenario, sports spread betting depends on the accuracy of your wager to the bookmakers prediction. Therefore what you win will depend on how right or wrong you are and the stake you choose.
As discussed earlier a spread is a range of results/possibilities. The spread bet is predicting whether the result will be below or above the spread.
Using the Sporting Index Free Bet on a Sports Bet
An example of a sports spread betting company is “sportingindex.com“. On this site one is able to place bets on various sporting or topical events such as football, golf, tennis, cricket, horse racing, and many other sports.
Example: Spreads in Sports Betting on Football
Say you wanted to spread bet on the world cup predicting that Brazil wins. The bookies quote a selling price 47.5 and buying price of 50.5.
The closing levels of specific outcomes are: winner- 100 points, runner-up- 75 points, losing semis- 50 points, losing quarters- 25 points, losing last 16- 10 points, 0 points for other loses.
If you contemplate Brazil wins the world cup and you bet £100 for every point you are right, you'll buy at a price of 50.5. If Brazil wins, you win 49.5 points as the market closes at 100. Consequently your monetary winnings will be multiplied by the number of points, thus (49.5*£100) £4950 is the amount you get. If they become runners-up you win 24.5 points (24.5*£100=£2450) as the market closes out at 75 points. If Brazil gets kicked out before the last 16 you lose 50.5 points as the market closes out at 0 points. Hence you'll lose (50.5*£100=£5050).
If you reckon Brazil have no chance of winning you could sell them at 47.5. If they play poorly in the early stages and their price drops to 20 you can buy back your bet for a 27.5 points profit (27.5*£100=£2750).
The greatest advantage of sports spread betting is its flexibility in being able to win big and getting out early. However, one thing to bear in mind is to always bet what you can afford to lose. If you read a market wrong, you might lose more than you bet and end up owing the bookies.