7 Spread Bet
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7 Spread Bet
Spread betting allows traders to bet on the direction of a financial market without actually owning the underlying security. Spread betting is sometimes promoted as a tax-free, commission-free activity that allows investors to speculate in both bull and bear markets, but this remains banned in the U.S. Like stock trades, spread bet risks can be mitigated using stop loss and take profit orders.
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Spread betting refers to speculating on the direction of a financial market without actually owning the underlying security.
Forex (FX) is the market where currencies are traded and is a portmanteau of "foreign" and "exchange." Forex also refers to the currencies traded there.
A bear put spread is a bearish options strategy used to profit from a moderate decline in the price of an asset. It involves the simultaneous purchase and sale of puts on the same asset at the same expiration date but at different strike prices, and it carries less risk than outright short-selling.
A cash-and-carry trade is an arbitrage strategy that exploits the mispricing between the underlying asset and its corresponding derivative.
Covered interest arbitrage is a strategy where an investor uses a forward contract to hedge against exchange rate risk. Returns are typically small but it can prove effective.
A bull spread is a bullish options strategy using either two puts or two calls with the same underlying asset and expiration.
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Spread betting is a derivative strategy, in which participants do not own the underlying asset they bet on, such as a stock or commodity. Rather, spread bettors simply speculate on whether the asset's price will rise or fall, using the prices offered to them by a broker.
As in stock market trading, two prices are quoted for spread bets—a price at which you can buy (bid price) and a price at which you can sell (ask price). The difference between the buy and sell price is referred to as the spread. The spread-betting broker profits from this spread, and this allows spread bets to be made without commissions, unlike most securities trades.
Investors align with the bid price if they believe the market will rise and go with the ask if they believe it will fall. Key characteristics of spread betting include the use of leverage, the ability to go both long and short, the wide variety of markets available, and tax benefits.
If spread betting sounds like something you might do in a sports bar, you're not far off. Charles K. McNeil, a mathematics teacher who became a securities analyst—and later a bookmaker—in Chicago during the 1940s has been widely credited with inventing the spread-betting concept. But its origins as an activity for professional financial-industry traders happened roughly 30 years later, on the other side of the Atlantic. A City of London investment banker, Stuart Wheeler, founded a firm named IG Index in 1974, offering spread betting on gold. At the time, the gold market was prohibitively difficult to participate in for many, and spread betting provided an easier way to speculate on it.
Despite its American roots, spread betting is illegal in the United States.
Let's use a practical example to illustrate the pros and cons of this derivative market and the mechanics of placing a bet. First, we'll take an example in the stock market, and then we'll look at an equivalent spread bet.
For our stock market trade, let's assume a purchase of 1,000 shares of Vodafone (LSE: VOD ) at £193.00. The price goes up to £195.00 and the position is closed, capturing a gross profit of £2,000 and having made £2 per share on 1,000 shares. Note here several important points. Without the use of margin, this transaction would have required a large capital outlay of £193k. Also, normally commissions would be charged to enter and exit the stock market trade. Finally, the profit may be subject to capital gains tax and stamp duty.
Now, let's look at a comparable spread bet. Making a spread bet on Vodafone, we'll assume with the bid-offer spread you can buy the bet at £193.00. In making this spread bet, the next step is to decide what amount to commit per "point," the variable that reflects the price move. The value of a point can vary.
In this case, we will assume that one point equals a one pence change, up or down, in the Vodaphone share price. We'll now assume a buy or "up bet" is taken on Vodaphone at a value of £10 per point. The share price of Vodaphone rises from £193.00 to £195.00, as in the stock market example. In this case, the bet captured 200 points, meaning a profit of 200 x £10, or £2,000.
While the gross profit of £2,000 is the same in the two examples, the spread bet differs in that there are usually no commissions incurred to open or close the bet and no stamp duty or capital gains tax due. In the U.K. and some other European countries, the profit from spread betting is free from tax.
However, while spread bettors do not pay commissions, they may suffer from the bid-offer spread, which may be substantially wider than the spread in other markets. Keep in mind also that the bettor has to overcome the spread just to break even on a trade. Generally, the more popular the security traded, the tighter the spread, lowering the entry cost .
In addition to the absence of commissions and taxes, the other major benefit of spread betting is that the required capital outlay is dramatically lower. In the stock market trade, a deposit of as much as £193,000 may have been required to enter the trade. In spread betting, the required deposit amount varies, but for the purpose of this example, we will assume a required 5% deposit. This would have meant that a much smaller £9,650 deposit was required to take on the same amount of market exposure as in the stock market trade.
The use of leverage works both ways, of course, and herein lies the danger of spread betting. As the market moves in your favor, higher returns will be realized; on the other hand, as the market moves against you, you will incur greater losses. While you can quickly make a large amount of money on a relatively small deposit, you can lose it just as fast.
If the price of Vodaphone fell in the above example, the bettor may eventually have been asked to increase the deposit or even have had the position closed out automatically. In such a situation, stock market traders have the advantage of being able to wait out a down move in the market, if they still believe the price is eventually heading higher.
Despite the risk that comes with the use of high leverage, spread betting offers effective tools to limit losses .
Risk can also be mitigated by the use of arbitrage, betting two ways simultaneously.
Arbitrage opportunities arise when the prices of identical financial instruments vary in different markets or among different companies. As a result, the financial instrument can be bought low and sold high simultaneously. An arbitrage transaction takes advantage of these market inefficiencies to gain risk-free returns.
Due to widespread access to information and increased communication, opportunities for arbitrage in spread betting and other financial instruments have been limited. However, spread betting arbitrage can still occur when two companies take separate stances on the market while setting their own spreads.
At the expense of the market maker, an arbitrageur bets on spreads from two different companies. When the top end of a spread offered by one company is below the bottom end of another’s spread, the arbitrageur profits from the gap between the two. Simply put, the trader buys low from one company and sells high in another. Whether the market increases or decreases does not dictate the amount of return.
Many different types of arbitrage exist, allowing for the exploitation of differences in interest rates, currencies, bonds, and stocks, among other securities. While arbitrage is typically associated with risk-less profit, there are in fact risks associated with the practice, including execution , counterparty, and liquidity risks. Failure to complete transactions smoothly can lead to significant losses for the arbitrageur. Likewise, counterparty and liquidity risks can come from the markets or a company’s failure to fulfill a transaction.
Continually developing in sophistication with the advent of electronic markets, spread betting has successfully lowered the barriers to entry and created a vast and varied alternative marketplace.
Arbitrage, in particular, lets investors exploit the difference in prices between two markets, specifically when two companies offer different spreads on identical assets.
The temptation and perils of being overleveraged continue to be a major pitfall in spread betting. However, the low capital outlay necessary, risk management tools available, and tax benefits make spread betting a compelling opportunity for speculators.
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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. 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. High volatility increases the risk of sudden, large or rapid losses.
To prioritise the service we give our existing clients, IG is not currently allowing any new positions on GameStop and AMC Entertainment.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. High volatility increases the risk of sudden, large or rapid losses.
To prioritise the service we give our existing clients, IG is not currently allowing any new positions on GameStop and AMC Entertainment.
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Spread betting is a way to speculate on the future direction of a market’s price. If you expect an asset’s price to rise, you’d open a position to ‘buy’ and if you expect an asset’s price to fall, you’d opt to ‘sell’.
When you spread bet, you’ll be putting up a certain amount of capital per point of movement in the underlying market. Your profit and loss would then be multiplied by this amount to get your final sum.
For example, you thought a stock was going to increase in price so you opened a spread bet for £10 per point. If the stock increases in price by 10 points, you’d have made £100 (10 x 10), but if it decreased by 5 points, you’d lose £50 (50 x 100).
Spread betting is also leveraged, which means you’ll only need to put down a small initial deposit to open a trade. Your end total is then calculated using your full exposure – meaning your profits and losses could be magnified.
Open a live account via our online form – you could be ready to trade in minutes, and there’s no obligation to add funds until you want to place a trade.
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A trading plan outlines your motivation, time commitment, goals, attitude to risk, available capital, markets to trade and preferred strategies. Creating one is particularly important if you’re new to the markets as it can help you take the emotion out of your decision making. It will also provide some structure for when you open and close your positions.
Once you're logged in to our platform or app, you can choose from 17,000 markets, including:
Of course, with so many markets to choose from, it can be difficult to know where to start. That's why we offer a range of tools and resources to help you analyse markets and identify opportunities:
Get technical and fundamental analysis straight from our in-house team
Keep your finger on the pulse with unique price and economic data alerts
Get actionable ‘buy’ and ‘sell’ suggestions based on analysis
Discover price trends using popular indicators such as MACD and Bollinger bands
See a full schedule of macroeconomic events and company announcements
Narrow down your choice of share by fundamentals, location, index and industry sector
Access unique insights including the day's recent activity and client sentiment
Start spread betting on our award-winning suite of platforms, including:
These can all be tailored to suit your trading style and preferences, with personalised alerts, interactive charts and risk management tools.
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When you open your platform, you’ll be able to search for a market in the top left corner or browse through each asset class.
After you’ve opened the deal ticket for your chosen market, you’ll need to choose whether to buy or sell the market – depending on whether you think the asset will rise or fall in price. You’ll also need to decide on your bet size, which will determine the margin you pay.
Finally, before you enter the market, it’s important to consider how you’ll manage your risk . Attaching stops or limits to your position will automatically close your trade once it hits a certain level – a stop-loss order can minimise your potential loss, while a limit-close order can help lock in any profits.
Once you’re ready, it’s time to open your trade. You can then monitor the profit or loss of your position in the ‘open positions’ section of the dealing platform.
When you decide it’s time to close your position, you just click ‘close’ to realise your profit or loss.
Whichever market you’re interested in, it’s important to understand how much capital you’re putting at risk. For spread betting, the calculation for this is:
Capital at risk = bet size x market price (in points)
When you spread bet, the market price will be displayed in points. For example, if you were trading a forex pair, instead of a price of ‘1.12980’ you would see a price of ‘11298.0’. So, a trade worth £10 per point of movement, would mean you’re putting a total of £112,980 at risk (11298.0 x 10).
As spread betting is a leveraged product, you will only need to cover the margin as opposed to the full value of the trade. The spread betting calculation for margin is:
Margin = margin factor x total exposure.
For the above example, if the margin factor was 3.33%, you would only have to put down £3762.23 (3.33% x £112,980) to open the trade. Leverage could potentially magnify your profit and loss, as they’re calculated using the full size of your trade – in this case, £112,980 – not just the margin.
You decide to spread bet on Barclays stock, which is currently trading at 150.25. If there was a one-point spread, you would be presented with a buy price of 150.75 and a sell price of 149.75.
You open a long spread bet position on Barclays, buying at £10 per point of movement at 150.75. If Barclays shares had a margin requirement of 20%, you’d need to deposit £301.50 (£10 x 150.75 x 20%).
Let’s say Barclays shares increased to 170.75, you might decide to close your position to take your profit.
You’d close the spread bet position at the new sell price of 170.25. As the market has moved in your favour by 19.5 points (170.25 - 150.75), your profit would be £195 (19.5 x £10). You won’t pay any tax on your profits. However, you would have to pay funding charges to keep your position open overnight.
However, let’s say shares of Barclays fell instead, down to 130.25, there would be a new sell price of 129.75. As the market has moved against you by 21 points (129.75 - 150.75), you’d be looking at a loss of £210 (210 x £10), plus any additional funding charges.
You decide to spread bet on forex on EUR/USD, which is trading at £1.19129. You think that the dollar is going to rise against the euro, so you decide to sell the currency pair.
As spread betting markets are listed in points, when you enter the platform you would see a market price of 11912.9. And, because of the spread, you would see a sell price of 11912.6 and a buy price of 11913.2.
You open the trade for £15 per point at 11912.6 and as EUR/USD has a margin factor of 3.33%, you’d need to deposit £5950.35 (£15 x 11912.6 x 3.33%).
Say EUR/USD fell to 11890.1, with a buy price of 11890.4 and a sell price of 11889.8. As the market has moved by 22.2 points (11912.6 - 11890.4), you’d have a total profit of £333 (£15 x 22.2). Remember, if you’d kept this position open overnight then your total profit would be lower because of funding charges.
However, let’s say EUR/USD rises instead. So, you’d close your position at the new buy price of 11936.0. As the price has moved against you by 23.4 points (11912.6 - 11936.0), you would have made a loss of £351 (£15 x 23.4), plus any funding charges.
You want to spread bet on the FTSE 100, which has an underlying market value of 7114. We’ll apply a one-point spread, so you can sell it at 7113.5 or buy at 7114.5.
As you anticipate that the FTSE 100 is going to rise, you opt to buy at £10 per point at 7114.5. The FTSE 100 has a margin factor of 5%, you’d only need to deposit £3557.30 (£10 x 7114.5 x 5%).
Let’s say your prediction is correct and the FTSE 100 increases in value. You close your position when the market reaches 7150 – at the new sell price of 7149.5.
As the market moved in you favour by 35 points (7149.5 – 7114.5), your profit would be calculated by multiplying this figure by the amount you’ve bet per point. This gives you a profit of £350 (£10 x 35) minus any funding costs.
However, let’s say the FTSE declined in price, instead of rallying. So, you decide to cut your losses when it hits 7078 – with a sell price of 7077.5.
The market has moved against you by 37 points (7077.5 - 7114.5), giving you a loss of £370 (£10 x 37), plus any overnight funding charges if the position was open for more than one day.
You decide to spread bet on gold, which is currently trading at 1315.70, with a buy price of 1316.00 and a sell price of 1315.40. As you believe the price of gold is due to decline, you open a spread bet to sell the commodity for £30 per point of movement.
Gold has a margin factor of 5%, so you would need to put down £1973.10 (£30 x 1315.40 x 5%) to open the position.
Let’s say the price of gold did fall, down to a new price of 1300.10. You close your position at the new buy price of 1300.40.
As the market has moved in your favour by 15 points (1315.40 - 1300.40), you would be taking a profit of £450 (15 x £30). If you had kept your position open overnight, you would also have funding charges to pay.
However, if you were incorrect and the market price of gold rose instead, to 1335.70, you would have made a loss. You’d close your position, at the new buy price of 1335.40.
As the market has moved against you by 20 points (1315.40 - 1335.40), your total loss for the commodity spread bet would be £600 (20 x £30), plus any funding charges.
If you’re a retail trader, you can spread bet on over 17,000 markets including forex, shares, indices and commodities. Professional traders are also able to spread bet on cryptocurrency markets, but trading crypto derivatives isn’t available to retail traders.
Spread betting is available to anyone who has sufficient knowledge and experience of trading. This will be assessed during the application process for an account with us.
Spread betting can be a useful tool for anyone who wants a range of asset classes, tax-free trading, and the opportunity to speculate on markets that are rising and falling in price. However, if you don’t feel ready to start trading live markets, you can start by building your knowledge with IG Academy’s range of online courses, or trading in a risk-free environment with an IG demo account .
The cost of spread betting depends on the bet size that you choose, how much capital you are willing to put up, and how long you keep your trade open for. Before you start to spread bet, it is important to establish what your parameters for trading are, and how much capital you can afford to risk.
Find out more about IG’s spread betting charges .
To open a new spread betting account with us, you just need to fill out a simple form so that we can establish your previous experience and available funds. This way we can ensure that you get the best trading experience possible.
Our mobile trading apps, state-of-the-art technology and free educational tools make the process of switching your account to us an effortless experience. So, you can be signed up and ready to trade within minutes.
Find out more about spread betting and test yourself with IG Academy’s range of online courses.
Discover the differences between spread betting and CFD trading
Learn about risk management tools including stops and limits
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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. 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. Professional clients can lose more than they deposit. All trading involves risk.
The value of shares, ETFs and ETCs bought through a share dealing account, a stocks and shares ISA or a SIPP can fall as well as rise, which could mean getting back less than you originally put in. Past performance is no guarantee of future results.
CFD, share dealing and stocks and shares ISA accounts provided by IG Markets Ltd, spread betting provided by IG Index Ltd. IG is a trading name of IG Markets Ltd (a company registered in England and Wales under number 04008957) and IG Index Ltd (a company registered in England and Wales under number 01190902). Registered address at Cannon Bridge House, 25 Dowgate Hill, London EC4R 2YA. Both IG Markets Ltd (Register number 195355) and IG Index Ltd (Register number 114059) are authorised and regulated by the Financial Conduct Authority.
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