If you’re looking for a way to access financial markets without making large investments, spread betting might be the answer. You might have heard of this tactic described as a derivative product or a form of financial speculation. But what does it actually mean, and what tactics work for spread betting success?
What is spread betting?
The origins of spread betting go all the way back to before World War Two. It’s thought to have come from the mind of Charles K. McNeil, who created it to bet on sports matches. In order to work out which teams were worth betting on, he compared their odds to his own point system. This was based on predicting the difference in score between the competing teams.
Bookkeepers soon adopted a very similar system, and spread betting was born. However, it wasn’t until the 1970s that it became a product for financial markets. This started with gold, which was a product few invested in because of the high cost. Investment companies realised there was a market for a product allowing people to speculate without having to own expensive shares, and financial spread betting was born.
However, the basics of spread betting are simple. Instead of buying shares and selling them if their value rises, you make a bet on whether the shares are going to rise or fall in value. Not only does this make it cheaper to enter the market, it also means you can make money on a stock that performs badly.
There are a few other advantages to this. First of all, the profits from spread betting are exempt from tax in the UK in most circumstances. Unless it is your main form of income, or you make extreme gains from it, you will not be taxed on the money you make. This is because you never own the shares you’re betting on.
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How do you spread bet?
There are a few main features of spread betting. The first is the initial bid-offer spread. This is the difference between the price to buy the stock and the price to sell. Generally, this will be worse than the price if you were buying the stock outright, so you will be buying at slightly higher and selling at slightly lower.
Once you have picked a position, you will choose a bet size. This is the amount you will win or lose per “point” the stock moves. A point can be a penny, a pound or another value depending on the market in which you’re betting.
For example, you might decide to bet on a stock trading at £100 per share and bet £10 per point. In this case, a point is a penny. If the share price increases to £103, it will have risen by 300 points. Based on your bet, this will lead to a £3,000 profit. However, if the share value decreases to £97, you would have to pay £3,000 instead.
Finally, you need to think about the duration of the bet. This is the length of time before the position expires. If you think a stock is volatile and only going to go up in value briefly, a shorter duration might be better.
What makes a good spread better?
Good spread betting has a lot in common with investing, but besides the lower cost of entry there are more options available. With the option to profit in the short-term on both shares rising and falling in value, there are a lot of ways for spread betters to succeed.
The key is to look at spread betting in the long term, and come up with a strategy for success. First of all, remember there is a risk involved with any bet. While you can potentially make profits, you can also lose large amounts. You should bet small amounts across a wide range of positions rather than putting all your eggs in one basket, hopefully making a small but steady income.
You can also mitigate your risk with a stop loss. This automatically cashes out the spread bet if the share value falls below a certain amount. You can use this to prevent yourself from losing too much, ensuring you can keep your profits as high as possible.
It allows you to enter the world of finance without needing a large stake to invest. Of course, like any form of investment or betting there are risks. You need to make sure you’re careful, but if you are then you can make a significant income from spread betting.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Tax treatment depends on your individual circumstances. Tax law can change or may differ in a jurisdiction other than the UK.
Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.
