Investing Spread Betting

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Investing Spread Betting
Spread Betting: What It Is & How It Works
Updated: May 20, 2022 Written By: Stephen Simpson Reviewed By: Jason Kirsch, CFP
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.
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The use of leverage is one way for an investor to enhance their returns, with the accompanying risk of magnifying the losses. There are several means to employ leverage. One option for some investors is to engage in what is called spread betting. While spread betting strains the definition of investing, it is nevertheless a way to make money from stocks, indices, and other types of securities through the use of considerable leverage.
Simply defining spread betting can be controversial; it can be defined as a derivative investment strategy, but it can also be defined as gambling. Further blurring the distinction, most spread betting companies refer to themselves as “brokers”, and many of these “brokers” openly refer to a spread betting transaction as a “bet”.
Spread betting is essentially speculating on the future direction of a specified financial instrument like an individual stock or index by making a directional bet with the spread betting company. The bettor chooses the security in question (like an individual stock or stock index), decides on the size of the bet, puts up a small percentage of the notional trade value as collateral (margin), and then profits or loses money depending upon how the price of the underlying security moves.
With financial spread betting, participants never own (and never can own) the underlying financial instrument. When an investor buys shares in a company, they become literal part-owners of that company, and when an investor buys a commodity futures contract there can be at least a technical possibility of taking physical delivery of the commodity, though most futures are settled in cash.
Spread betting is illegal in the United States as of this writing. Most spread betting companies in the U.K. will not open spread betting accounts from U.S. residents but may offer Contract for Difference (or CFD trading).
Tip: Spread betting used to be legal in the United States and was conducted at places called "bucket shops". Bucket shops were blamed for contributing to two market crashes in the early 1900s, with the practice eventually banned in the early 1920s. Investors can read more about bucket shops in Edwin Lefevre's book 'Reminiscences of a Stock Operator'.
Just as with betting on a horse race or sporting event, spread bettors win or lose money based upon the outcome of the bet, though spread betting is not an all-or-nothing proposition like sports betting. It’s also important to note that the word “spread” means something different with financial spread betting than the term “spread” as it applies to sports betting.
Likewise, spread betting and spread trading may sound similar, but they are very different. Spread trading involves simultaneously buying and selling related financial instruments to profit from a change in the underlying difference in value (the spread) between the instruments.
For instance, traders can play the “crush spread”, the difference between the value of a soybeans futures contract and the value of soybean meal and soybean oil contracts. This difference is the profit margin for processing soybeans into soybean meal and soybean oil and it can shrink or expand for a variety of reasons. If a trader believes that that margin is likely to change, they can engage in spread trading by simultaneously buying and selling soybean, soybean meal, and/or soybean oil contracts to profit from that change.
The would-be bettor decides what security they wish to bet on from among those offered by a spread betting company.
The bettor then decides on the stake size—how much they want to bet on each point , or the minimum movement in the security price. A point will typically be equal to a penny per share for a stock and a point for a stock index futures contract but can vary for other instruments like commodities. In other words, a bettor can make a bet that will pay (or lose) £5 for every penny that a stock goes up or down or every one-point change in the value of an index futures contract.
The stake size determines the notional amount of the bet—a £1 stake for a stock trading at £15 means a notional trade value of £1,500 (£1 per penny).
However, a £3 stake for a stock trading at £30 would have a notional value of £9,000.
The notional amount of the bet determines the required minimum margin, which can range from under 5% to 20% depending upon the security and the spread betting company.
Once the minimum margin is in place, the bet is executed, with the bettor paying the worse of the offered spread (buying at the higher ask price or selling at the lower bid price). The bettor can end the bet at any time, doing so by reversing the transaction (selling at the bid price or buying at the ask price).
Spread bets have durations. Generally, bets either expire at the end of the day or at the end of a quarterly period (more typical with futures contracts).
To better understand how spread betting can work, consider the following example, which first includes an example of a regular stock transaction:
An individual wishes to day trade in the shares of XYZ Plc, and those shares currently trade at a bid/ask spread of £100.00/£100.10, with a brokerage charging a £5 commission to buy or sell.
The individual decides to buy 100 shares and the trade is entered in the morning at £100.10 with a £5 commission, for a total cost of £10,015.
During the day the price of XYZ Plc shares increases by £5/share and the trade is closed successfully at a bid price of £105, with another £5 commission. The individual now has £10,495, earning £480 (before considering taxes).
In this example, the individual needed to have the £10,015 from the start of the transaction, or employ margin.
Now consider that transaction as a spread bet.
First, that individual must decide on their bet size, also known as the “stake” – the amount of money they’re committing to each minimum price move of the underlying instrument. In this case, the investor chooses a stake of £1 per “point” (the point is the minimum price move for the instrument, in this case, £0.01 per share).
While XYZ Plc is trading at £100.00/£100.10 on the stock exchange, the spread offered by the spread betting company is £99.90/£100.20. In this case, then, the notional amount of the transaction is £1/point times the spread betting company’s ask price, or £10,020
The broker requires a 20% deposit, or £2,004 .
As in the prior example, the share price of XYZ Plc increases by £5/share and the investor decides to close the bet before the end of the day, selling at the betting company’s new bid price of £104.90. The profit from the bet is £470.
((£104.90 - £100.20) x £1 per £0.01) = £470
That is almost the same profit as in the earlier example ( £ 480), but there are no taxes later, and the return on initial investment is much larger—more than 23% (£470/£2,004) versus 4.8% (£480/£10,015).
Now consider an example where the value of XYZ Plc shares falls. In this case, the share price falls just £2 to £98.00/£98.10, with the bettor seeing a spread of £97.90/£98.20 from his spread betting company. The value of the bet has now declined by £230.
(£100.20 - £97.90) x £1 per £0.01 = £230
This leaves £1,774 from the original deposit, or a 11% loss .
If the investor had purchased the shares and seen a similar decline, the loss would have been £205 just over 2%, and that loss would be tax deductible.
(((£100.10 - £98) x 100) - £5) / £10,015 = 2%
In this example, the person bought and sold within a day. This is an important detail because of the impact of financing/holding costs. If the share price hadn’t moved at all (ending the day at a bid/ask of £100/£100.10) and the individual chose to carry over the trade to the next day, it would incur an extra cost of around £7 to £9 (at typical spread betting company rates as of this writing). That cost would be incurred every day the trade was open while acquiring the shares for cash would incur no day-to-day costs.
Since spread betting involves large amounts of leverage, risk control is a key concern and a key element to long-term success. Setting maximum allowable losses is a useful strategy for limiting risk and can be achieved through stop loss and guaranteed stop loss orders.
A stop loss order allows a spread bettor to limit risk by establishing a predetermined price at which the broker will close the transaction. Many brokers require stop orders on every trade, and that may include an automatic stop loss order entered when the initial transaction is executed.
Tip: Stop loss orders do not offer perfect protection. When the specified price is reached, the stop loss order becomes a market order and there can be slippage between the price of the stop loss and the actual price at which the transaction is closed out – this slippage can be larger in periods of elevated volatility and is also influenced by how quickly the spread betting broker executes transactions.
Most brokers now offer guaranteed stop loss orders (or GSLOs) in addition to regular stop loss orders. Guaranteed stop loss orders ensure that the trade will be closed at the specified price, irrespective of what happens in the market to the underlying security or the broker’s execution—if a stock or index gaps lower at the open and beyond the GSLO level, the bettor will still see the bet closed out at the guaranteed price.
Spread betting companies require bettors to pay an additional fee for a guaranteed stop loss order, and that payment may be charged on the front end of the transaction (so the participant pays the premium whether or not the guaranteed stop loss order is executed) or only if executed. The cost of a GSLO is usually expressed as a multiple of the stake or a percentage of the notional trade value. As is the case with virtually all fees with spread betting, there will be company-to-company differences in the cost of GSLOs, and companies compete on both the cost and whether it’s charged upfront or only if used.
Spread betting is essentially a way to make highly leveraged directional bets on markets, stocks, commodities, and other securities. There are definite advantages to spread betting for some individuals, but many of these advantages carry “fine print” that participants must consider.
Spread betting got its start in the U.K. in the 1970s primarily as a way for individuals to speculate on the gold market ; a market that at that time was very difficult for individual investors to access. Practically speaking, the only limits on spread betting are what spread betting companies are willing to offer, so spread betting can be done with thousands of individual stocks, stock indices, interest rates, currencies, commodities, and other financial instruments.
Tip: Most spread betting companies require spread bettors to use the full available margin.
Spread betting also carries several significant limitations that participants must consider.
The most significant of these limitations is that the bettor never actually owns the underlying asset. While an investor who buys shares with cash and sees the price decline can choose to wait for a recovery in the price, the combination of holding costs and margin requirements can force a spread bettor out of their position before any recovery can take place.
There are also numerous fees that apply to spread betting.
First, participants must pay the entry spread , buying at the ask price and selling at the bid price. If shares of XYZ Plc are trading at a bid/ask spread of £100/£100.10, a spread bettor would buy at £100.10 and would immediately have a £0.10/loss if they then closed the position (selling at the £100 bid). It’s important to note, though, that the spread a spread bettor pays is set by the spread betting company will usually be different (worse) than the spread in the actual underlying market.
Spread bettors will also be subject to financing charges (also called holding or funding charges) if they hold their positions overnight. In essence, this is similar to margin loan interest charges but charged on a daily basis. The amount of the financing charge is calculated as the end-of-day notional position value times the interest rate divided by 365 (some brokers will use a different denominator for some instruments, like U.S. stocks). The amount is then automatically deducted from the account.
Some brokers will charge fees on funding and withdrawal transactions, as well as “exchange data fees” and account inactivity fees. Brokers often compete on the basis of these fees and it is a good idea for bettor to shop around and consider multiple spread betting companies before starting spread betting.
If a spread bet moves against the bettor they may face a margin call . Margin calls are triggered when the equity of the bettor’s account falls below a threshold established by the spread betting company and/or regulators. Once the threshold is breached, the bettor must deposit more cash or close some open transactions to raise the equity level back above the minimum threshold.
Most U.K. spread betting firms have maintenance margins of 80% , meaning that investors must maintain an equity value of 80% or more of the initial margin. Spread betting accounts will also have a pre-specified margin closeout level—if the equity value of the account falls below that level, the broker will automatically start closing out open positions. In the U.K. there is a regulatory closeout requirement at 50%, but companies can have higher minimums if they choose.
There are important differences between spread betting margin calls and typical equity margin calls. The most significant is that a retail spread bettor’s losses are limited to the money in their account—due to regulator-mandated negative balance protection (which ties in to the mandatory closing out of positions if the account falls below the 50% threshold) bettors cannot lose more than what is in their account. While the losses from an individual trade can exceed the initial margin amount, the maximum loss is limited to the value of the account.
Another limitation in spread betting is that the bid/ask spreads in spread betting are decided by the spread betting company. While they will be related to the current bid/ask spread of the underlying financial instrument, the companies make their profits in large part off of those artificially-widened spreads.
Brokers compete on the combination of their spreads, as well as the range of products they offer, the quality/speed of execution, margin requirements, and various fees. Some brokers may offer wider spreads, but offer access to spread betting on financial instruments that other brokers do not offer. Spreads can widen during periods of elevated volatility and can vary between similar instruments in the same class (different stocks or indices could have different spreads).
A contract for difference (or CFD) is a short-term leveraged derivative contract between an investor/bettor and a spread betting firm that tracks the value of a specified underlying financial instrument (like a stock, stock index, commodity contract, et al). CFDs are always settled in cash and there is never a physical delivery of the underlying instrument.
The advantages and disadvantages of CFDs are largely similar to those of spread betting—namely the opportunity to employ significant leverage to profit from the price movement in the underlying security, but with the risk of larger losses compared to trading strategies that do not employ leverage.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.


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In The Chair


We were told that the major recession of 2008 was a once-in-a-generation crisis. However, today’s cost of living crisis and a looming recession have brought economic concerns back to the forefront of many people’s minds.
With salaries failing to keep pace with inflation and many sectors moving to reduce pensions, individuals are looking for ways to create a stable financial future. Investing in the stock market is the first way to create an additional income stream that many people consider, but quite often without weighing up the risks.
Traditional investing is not for everyone. Younger generations are finding ways to invest that are usually reserved for bigger players who already have considerable capital at their disposal.
Even as we move towards digital options in most areas of life, investing in tangibles is still a classic move. Real estate is the most obvious option, though the bar to entry is fairly high. Art and collectibles such as stamps and coins are top options as well. More niche choices, such as investing in cask whiskey, are finding audiences as well.
Finding ways to play the stock market that do not involve investing heavily is on the rise as well. Lured by quick wins, many turn to day trading – an activity of high stakes that many find appealing.
While day trading software has made this accessible to most, it still requires quite a significant investment. In the United States, for example, anyone who makes more than three trades every five days is required to always have $25,000 in their account. This rule doesn’t apply in the UK, but it does highlight how risky and volatile this type of trading can be and the kind of capital you need to be comfortable losing.
There is, however, a particular way to speculate on daily market movements that tends to attract more risk-averse traders. Spread betting allows you to participate in day trading without actually buying any stocks. This article will give a brief overview of how spread betting works and why it is an interesting alternative to traditional investing.
Spread betting is a method of speculating on the daily market movements that doesn’t require the heavy investment of purchasing stocks. Instead, you are essentially betting on what the market will do.
When you select a stock or commodity to bet on, the broker will offer two prices. One of these — the bid price — is slightly higher than the actual current price of the stock. You buy in at this price if you think the stock will go up in value. The other — the ask price — is slightly lower than the real price of the stock. You select the ask price, also known as the sell price, if you think that the stock will go down in value.
Instead of having to pay the full price for a share, you buy in at a percentage of the cost. This is the margin. Margins make it possible to leverage a much larger position without putting all the money upfront. Margin trading is less expensive initially and then magnifies either your returns (hopefully) or your losses (unfortunately).
When you are ready to select a broker to open a spread betting account with, look through the margins that they offer before signing up. Just as you search sportsbooks for the best odds when you are looking to place a bet on sports, it’s a s
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