Spread Betting

Spread betting refers to placing a bet on the price movement of a security. It is a trading strategy where traders do not earn from buying or selling an asset but by speculating the direction in which the market is expected to move. Investors can spread bets on currency pairs, forex, indices, commodities, shares, treasuries, and cryptocurrencies.

A stock broker offers a bid price, and an ask price. In the spread betting process, investors have to predict whether the price would be lower than the bid price or higher than the ask price. If the same goes right, they win.

• Spread betting is more or less betting on future movements in the market.
• It is all about betting on the movement of security with respect to its price. Generally, a spread betting company quoted two prices (ask and bid price).
• Spread betting enables traders to trade in various markets, including currency pairs, forex, indices, commodities, shares, treasuries, and cryptocurrencies.
• The profits earned from spread betting shall not be charged for capital gains tax and stamp duties.

Spread betting is all about trading in market directions. Here, investors do not own an asset, but they predict its price movement. Based on their experience and the market trends, investors speculate if the price of the security will rise or fall in the future. It is different from taking a traditional trade where investors buy stocks, hold them, and sell when the prices are high.

Depending on their prediction, traders place a bet on the price movement for security. If the bet is accurate, they enjoy gains, while they lose if their speculation goes wrong and the market moves in the opposite direction.

As the investors/traders do not have the ownership of the asset, they can either choose to go short (sell bet) or go long (buy bet), considering the market's direction. For example, if they expect the market to go up, they can click on buy, while if they think the market will go down, they can click on the sell option.

Three components help explain spread betting better – spread, bet size, and bet duration. First, traders have to pay a charge while dealing with the brokers. In a spread bet, this charge is covered by the difference between the ask price and bid price, referred to as the spread. This differential amount becomes the fee that traders pay to open a position. In short, the traders do not have to pay anything. Instead, it is the spread that covers the cost.

The bet size is the next important factor that guides the deal. Choosing a bet size helps traders allocate the portion of their funds to each trade on a per point basis. In addition, it indicates the amount investors are likely to lose or gain for each point of the price movement for an asset in the market. For example, if traders go for a $2 per point spread betting for an Amazon stock going up, for every movement upward, they earn $2. On the other hand, if there is a downward movement in the market, they would lose $2 for every point-wise drop in the prices.

The bet duration marks the period before a position expires. Every bet comes with a fixed tenure, which can be for a day or even months in a row.

In spread betting, traders have to start with depositing a small initial amount to open a position or initiate trade. This amount is known as the margin. It can be of two types – deposit margin and maintenance margin. While the deposit margin is concerned with the primary funding required to initiate a position, the maintenance margin is the additional fund that would be required to maintain the open position.

The brokers use the maintenance amount to cover up the losses incurred by investors. However, in case of a shortfall, stockbrokers notify the traders via margin calls, asking them to renew the balance to ensure the services continue.

Investors can go for standard stop-loss orders to mitigate the risks associated with a spread bet. Choosing this option will mean closing out a trade that is likely to incur losses for traders. Here, as soon as the market crosses a particular price level, the deal automatically closes at a level that is less harmful to them. It is a great alternative for a highly volatile market.

Another option to reduce the risk of spread betting is initiating guaranteed stop-loss orders. It ensures the closure of a trade at the exact value set by investors/traders irrespective of the market conditions. However, this alternative is not free of cost. To have this opportunity, participants have to pay an additional charge to brokers.

Arbitrage is the next option. Two-way betting can save traders from falling prey to a spread bet risk. They get such an opportunity when the price of an asset is different in different markets. This way, they can buy it in one market at a lower price and simultaneously sell it in another at a higher cost.

ABC Ltd is currently trading with an ask price and a buy price of 19504 ($195.04) and 19519 ($195.19). Trader X anticipates that the share prices of ABC Ltd might rise in the near future. Hence, he decides to buy more of these shares for $10 per change point in 19519.

If the company's share price rises, Trader X will choose to close his trade as soon as the ask price touches 19549. Since the market increases by thirty points, Trader X will earn a profit of $300, excluding all the extra costs.

On the other hand, if the market moves downwards to an ask price of 19449, Trader X loses. Since the market decreases by seventy points, Trader X would incur a loss of $700, exclusive of additional costs.

A spread bet has numerous advantages. However, it is not devoid of the disadvantages. Let us have a quick look at the pros and cons of spread betting:

This is a guide to what is Spread Betting & its meaning. Here we explain its risk mitigation mechanism, components, pros and cons, and examples. You can learn more from the following articles -

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