Explain Betting Spread

Explain Betting Spread

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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.

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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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What is the spread in sports betting? If you’ve never seen it before, you might think that it looks quite complex at first glance. However, it’s actually pretty simple…
In this article, not only will you find the ins and outs of the betting spread explained in full, we’ll also give you our tips and tricks for betting against the spread. By the end of this article, not only will you be able to understand the spread, you’ll also have the tools required to win spread bets.
What is the spread in sports betting? Well, to understand what the spread is and fully answer the question we first have to understand the betting rules of a moneyline and how it works. If you’re not already aware of the moneyline, it is your bread and butter when it comes to sports betting. The moneyline shows you the straight odds for both outcomes of a particular sports game or event. There are two different sides of the count to be aware of here — the favorite and the underdog. The favorite is the team that has a higher chance of winning and therefore has shorter odds and spreads. The underdog is the team that has the least chance of winning and therefore has longer odds and spreads.
In this example, we can see that the Rams are favorites, as they are offered at minus odds/spreads. The -140 represents the amount that you would have to stake in order to make a potential profit of $100 should you bet win. The 49ers are the underdogs in this contest and are thus offered at plus odds/spreads. Here, the +120 shows you how much profit you would make on a winning bet with a $100 stake.
If we convert these odds to percentages, it works out as follows: the Rams have a 58.3% chance of winning, while the 49ers have a 4.5% chance. As you can see, the contest is heavily more weighted toward the Rams.
The purpose of the spread is to change that, so let’s take a look at how it does it…
The spread essentially exists to even up the contest, by deducting points from the favorite and giving the same amount to the underdog. For you as a bettor, you are now betting against the spread rather than the real final result. It is also worth knowing what the spread is if you want to understand the betting parlay meaning and how this and other betting types fit into the bigger picture.
Let’s take a look at how it works in practice by reusing the NFL example from above:
Here we can see that the Rams are favorites and the 49ers are underdogs, as was the case with the moneyline, only the scores have now been evened up. If you were to bet on the Rams on this line, you would need them to win by 8 points or more in order for your bet to payout. If you were to bet on the 49ers, your bet would still payout in the event of them losing, so long as they stayed within 7 points of the Rams.
Now that we’ve answered the question “what is the spread in sports betting?”, let’s take a look at how the odds work with the spread. With the moneyline, the odds for each team are vastly different, because the odds and spreads reflect the difference in the two teams’ chances of winning. The spread, however, has evened up the score. As a result, the starting odds and spreads will always be the same.
Typically, the odds for the spread on all sports will start at -110. However, if the sportsbook sees a lot of money coming in on one side in particular, especially if they’re working on some new sportsbook promotions , they may shorten the odds on that side to -115 and lengthen the other to -105 to try and even things up.
Just like the odds and spreads, the spread can also change in the run-up to a game. This can be influenced by both factors relating to actual sport and the betting activity that the sportsbooks are seeing happening behind the scenes. For example, let’s say the spread of the above example is released the Monday after the prior weekend’s fixtures. On Wednesday we find out that Matthew Stafford is injured and the Rams need to use their backup QB instead. As well as the moneyline odds changing to reflect this, the spread would almost definitely shrink, perhaps to say, 3.5.
So, what is the spread in sports betting? We feel like we’ve answered that question as best we can. However, we understand that you will most likely have some other questions about the spread and how it works. That’s why below our experts have answered the most commonly asked questions that we see come in regarding spread betting in sports.
Technically speaking, you could get a points spread of zero, however, this is extremely rare. In most cases and especially in football, the smallest spread you will see is 0.5. This is what is known as a pick’em.
You may have noticed that in the above example, we used figure 7.5. With NFL games, the spread almost always contains .5 numbers. This is the same for most sports, however, in the likes of basketball, round numbers are common. The reason that half numbers are used is to eliminate the probability of a tie altogether. If we refer back to the above example, with a 7.5 spread, it’s clear that the favorite needs to win by 8 points or more and the underdog needs to stay within seven points. However, if the spread was 7 and the game ended with a points difference of seven, then both sides would have a claim to the win. Half numbers give the sportsbooks an easy way of eliminating this possibility.
There’s no straight answer to this as it depends on the league, the sport, the team, and even components like whether you’re live betting or making a pre-game wager. The best time to get a picture of whether to bet against the spread on a team is around mid-season. By this point, you can check a team's record against the spread. For example, you might think the Lions are a chumps bet with a 1-8 record mid-season. However, on closer inspection, you might see they are actually 6-2 against the spread as they tend to keep games close. In this case, an underdog spread bet might be worth your while.
If we refer back to the original question here and consider what is the spread in sports betting, there is a reason that it is generally referred to as “the” spread, as there is only one spread per game. When you see a basic betting line in the US, it will typically show three markets — the moneyline, the spread, and the total. In the UK, multiple spreads for the same game is common, but not here in the US.
What is the spread in sports betting, and does it work the same for every sport? While the principle of the spread remains the same for all sports, there are some small differences in how it works with some sports. In some sports and leagues, including the NHL and the MLB, the spread even has a different name. This question actually deserves a bit of a breakdown, so we’ll take a look at it in more detail below.
Now that we’ve extensively answered the more general question of “what is the spread in sports betting?” , and answered your most frequently asked questions, let’s now take a look at the detailed differences between sports.
We’ve thrown these two in together, as the spread works very similarly when it comes to betting on both the NFL and the NBA. They are both high-scoring sports and the spread numbers can vary massively in range from 0.5 right up into double figures.
In baseball, the spread is actually referred to as the run line, however, it is mostly different in name only, and it functions the same as the spread in the sports mentioned above. The one major difference though, is that the spread is always lower, due to the low-scoring nature of the game. In fact, if you were to ask us what is the spread in sports betting for baseball, the answer is almost always 1.5. In rare cases, you might see a 0.5 or 2.5 spread in baseball, but 90% of the time it will be 1.5.
Just as is the case with baseball and the MLB, the points spread in hockey also has its own unique name. What is the spread in sports betting for hockey and the NHL? It’s actually known as the puck line. As is also the case with baseball, hockey is a low-scoring sport, and this is reflected in the spread. The most common spread in hockey is also 1.5, however, unlike with baseball, this can change and fluctuate quite a bit. In particularly one-sided games, it’s not that unusual to see an NHL puck line of 4.5.
Soccer is probably the sport in which the actual functionality of the spread differs the most from other sports. This is because the Asian handicap model has been adopted, meaning that unlike other sports, where only round and half numbers are used for the spread, you can actually get .25 and 0.75 spreads in soccer.
This is because, unlike the sports mentioned above, tired games are very common in soccer. If you bet on a +0.75 underdog, then your bet would payout in full if the team wins or ties the game. If they were to lose by one goal, then half of your stake would be refunded.
So, we’ve pretty much covered all of the essential information regarding the question, what is the spread in sports betting? Basically, the most important thing to remember is that it is used to even up a contest, and the odds for both spreads in a game will almost always be the same at -110. If betting the spread, just remember to check each team’s form against the spread rather than th
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