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What is Spread Betting?

December 2016

Spread betting is a way to trade a financial asset that involves making a bet on the direction in which the asset’s price is headed

As a starter, Spread Betting comes handy in case you are strongly opined on the direction of financial asset. Thus, if you are expecting Gold to move downwards in the near term or the S&P 500 to reverse a certain trend it’s been following, Spread Betting could lead you in registering a sizeable profit in a short period.

Spread betting allows one to speculate on whether the price of an asset will rise or fall. It traverses the entire gamut of assets, shares to commodities to stock indices or even real estate prices. So what’s the difference as compared to regular trading? The difference being, you do not necessarily buy or sell the underlying asset; instead, you take a view on the prices offered by the spread betting provider as to whether the price will rise or fall. It is a way of speculating on an outcome, where your degree of accuracy determines the size of your profit (or loss).

Before moving ahead, it makes sense to understand the bet. The price movement of the underlying market is measured in points. Each movement is considered as a point. The amount you choose to bet per point of movement is up to you, as long as it meets the minimum bet size accepted for that market. Your profit or loss, then is the difference in points between the opening price and the closing price, multiplied by the value of your bet per point.

Here’s a detailed example, a Spread betting firms offer you a quote, which consists of a bid (a price you would buy at) price and a slightly higher offer (price they would buy at) price. If the S&P 500 stands at 2100, the spread betting provider will likely offer you a bid price of 2098 and an offer price of 2102. If you think that the index will rise, you might buy for USD 10 / point at 2102. For each point the S&P 500 rises, you will earn USD 10. Say the S&P 500 rises to 2120 by the day’s close, and you decide to close out your bet. Your profit will be USD 180 (2120-2102 = 18 x USD 10).

In effect, gains or losses can be sharp. For initiating a trade, you are required to deposit a margin generally at around 10% of the value of your bet. If the losses on a trade threaten to exceed that margin, you will be required to honour a margin call. It is advisable to trade in this segment with strict stop losses, particularly in current times given the heightened level of volatility across asset classes.

Given the obvious nature of this way of trading, akin to gambling, it does not find favour with regulators. The UK is one market which sees a majority of activity within this space based on the prevailing rules, which do not tax profits on bets. The UK has recently seen the emergence of Flexihedge, the world’s 1st P2P financial betting exchange. Traders, in markets where the same is allowable, find it a cost effective way of participation, not requiring a brokerage fee. The spread betting provider makes his money from the difference between the bid and offer prices.

As for potential participants, it needs to be understood that investments are not akin to gambling and both these activities differ in the fundamental aspects, of both execution as well as the time of investment maturity. One needs to be clear on their objective of participation in the financial markets. It is therefore clear Spread Betting is not for the faint hearted.

Did You Know?

– Spread betting allows one to speculate on whether the price of an asset will rise or fall.

– A spread betting firm offer a quote, which consists of a bid price and a slightly higher offer price.

– It is a way of speculating on an outcome.

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