Is Spread Betting Halal
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Is Spread Betting Halal
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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Note: Although spread betting sites allow you to trade with more than you have in your account through a margin system, this also means that you will lose your entire stake if your trade is liquidated.
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1. IG –Best All-Round Spread Betting Broker
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2. Spreadex – Spread Betting on Financial Markets & Sports
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Spread betting platforms allows you to speculate on the future price of a financial instrument without you owning the underlying asset. This includes everything from gold, oil, natural gas, stocks, indices, and cryptocurrencies.
The overarching concept is that you need to determine whether you think the asset will go up or down in relation to its current price. If you’re correct, your profit is calculated by taking your stake-per-point, by the number of points the asset increased by.
Traders often opt for spread betting brokers because in most jurisdictions – gains are tax-free. Moreover, not only can you trade without paying any commissions, but spreads are usually much more competitive than traditional investment avenues.
With that said, spread betting can appear somewhat confusing at first glance if you’ve never dabbled in the space. As such, we would suggest reading our Learn 2 Trade 2021 Guide On Spread Betting – where we explain everything you need to know.
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Spread betting is a form of trading – similar to that of CFDs. This is because you will have access to thousands of financial instruments, which you can trade without taking ownership of the asset. The main concept is that you need to speculate on whether you think the asset will increase or decrease in value – in relation to its current market price.
For example, if the FTSE 100 is trading at 2,700 points – a ‘long’ order would indicate that you think the index will increase in value. Alternatively, if you placed a ‘short’ order, you think the opposite. Before you place your respective order, you also need to enter a stake.
In the world of spread betting, your trade size is expressed as a ‘stake-per-point’. Then, for each point that you are correct or incorrect by, is multiplied by your stake. For example, if you staked £1 per point on the FTSE 100, and you closed the trade at 2,800 points, this would mean that you won £100.
This is because the FTSE 100 ended up 100 points higher (2,800 – 2,700), and your stake-per-point was £1. At the other end of the spectrum, if you went short – your total loss would have also stood at £100 – as you were wrong by 100 points.
Spread betting operates on a points system, where your profits or losses are based on the number of points you were over or under on the trade. Confused? Well, let’s say that you were trading Nike stocks at $85.50. In spread betting terms, $85.50 would translate to 85.5 points. Then, let’s say that you went ‘long’, which means you think Nike stocks will increase in value.
If you then closed your trade when Nike was priced at 87.0 points (or $87.00), your spread betting trade was successful by 15 points. This is because in this example – each point was based on every $0.10 that the stock went up by. So, if we staked £1 per point, we would have walked away with a profit of £15 (15 points x £1).
Similarly, if you staked £5 per point, your successful Nike stock trade would have netted £75 in profit (15 points x £5). There is, of course, the possibility that your spread betting trades will sometimes go against you. In other words, had the value of Nike stocks gone down , you would have lost money.
For example, let’s say you cashed out your trade when Nike was priced at $82.50. As this translates to a loss of 30 points (85.5 – 82.5), a £1 stake would have lost you £30. In fact, there is no limit to the amount you can lose in spread betting – as trades are based on margin.
Let’s look at a couple of other examples to clear the spread betting mist.
In our first example, we are going to be trading oil. We think that at $28.0 per barrel, the commodity is heavily undervalued. With rumours of a reduction in production output by OPEC and Russia, you decide to go long. This means you think the price of oil will increase against its current price of $28.0 – or 28.0 points.
As we noted earlier, spread betting trades won’t always go in your favour – so we now need to look at an unsuccessful example.
To keep things simple, we’ll stick with the same example as above, where oil is priced at $28.0 or 28.0 points. Only this time, things don’t go to plan.
This is a prime example of how easy it is to lose money when you engage with spread betting. On the flip side, you can easily mitigate your risks by installing a sensible stop-loss order. As we cover in more detail later, this allows you to automatically exit your trade when the markets go against you by a pre-defined percentage.
In a similar nature to CFDs, spread betting brokers give you access to thousands of financial markets. This ensures that you are able to create a diversified portfolio of holdings – 24 hours per day.
Below we have listed some of the most popular asset classes that you can trade at a spread betting site.
Stocks: You can spread bet thousands of blue-chip equities across dozens of marketplaces. Think along the lines of the LSE, NASDAQ, and NYSE.
Indices: If you want to trade the wider stock markets, spread betting platforms also host indices. This includes the S&P 500, Dow Jones, FTSE 100, and NASDAQ 100.
Energies: You can also trade energies. This includes the main oil and natural gas markets.
Hard Metals: The hard metals space includes everything from gold, oil, and copper.
Agriculture: If you want to gain exposure to agriculture products like wheat, crops, sugar, and grain – spread betting platforms typically support these markets.
ETFs: Further highlighting just how extensive spread betting platforms are – you can also trade ETFs.
Currencies: In a similar nature to forex trading sites, spread betting brokers also allow you to speculate on the future direction of popular currency pairs like GBP/USD and EUR/USD.
Cryptocurrencies: Some spread betting sites also allow you to trade the future value of popular cryptocurrencies like Bitcoin and Ethereum.
So now that you know the basics of spread betting, we now need to look at some of the key terms that you are all-but-certain to come across.
First and foremost – make sure that you know your longs from your shorts. As we briefly covered earlier, going long on a market means that you think the asset will increase in price. This is the same as placing a ‘buy’ order when trading CFDs, or a ‘call option’ when investing in an options contract.
If you went short on a spread betting market, this means that you think the asset will go down in value. Once again, this would equate to a ‘sell’ order when trading CFDs, or a ‘put option’ in the options trading space.
Spread betting platforms allow you to trade with more money than you actually have in your account. For example, let’s say that you wanted to buy £1,000 worth of Disney stocks. Ordinarily, if you bought £1,000 worth of shares with an online stockbroker, you would get £1,000 worth of shares.
However, spread betting sites allow you to apply leverage to your trades – so your £1,000 balance would allow you to trade with significantly more.
Crucially, trading on margin can go one of the two ways. You either win your spread betting trade and amplify your winnings, or you get liquidated and lose your margin.
For example, if you went long on Disney stocks and the price increased by 20%, you would have made a total profit of £200 (20% of £1,000). However, as you applied leverage of 10:1, your profit was actually £2,000 (£200 x 10).
If the markets went the other way, and Disney stocks went down by 10%, you would have lost your margin. As such, the trade would have been liquidated and the broker would have kept your £1,000 margin.
Much like any other investment channel in the financial markets, you must have a firm grasp of the ‘spread’ when spread betting online. For those unaware, this is the difference between the buy and sell price of an asset. In the case of spread betting, it’s the difference between the ‘long’ and ‘short’ entry price – and it’s always expressed in points.
For example, let’s say that you are trading oil.
As per the above example, this means that you need to make gains of at least 30 points(1.11%) on your spread betting trade just to break even. This is expensive.
The good news is that the spread betting brokers recommended on this page offer spreads that are significantly more competitive than this.
You also need to assess the ‘bet duration’ before placing a spread betting trade. As the name suggests, this merely refers to the duration of your bet. This usually comes in one of two forms – a daily funded bet or a quarterly bet.
The greatest risk that you face when spread betting is having your trade liquidated. Although we briefly covered how this works earlier, it’s important for us to expand. After all, a liquidated trade will result in you losing your entire margin.
So, the first thing that we need to do is assess how much margin we are actually required to put up in percentage terms.
On the one hand, it’s great that you are able to trade £5,000 worth of Apple stocks by putting a deposit of just £500 down. However, if the markets go against you, that £500 is at risk of being lost in its entirety. In fact, this would happen if the price of Apple went down by 10%, as this would amount to a real-world reduction of £500.
Before you get to the point of liquidation, the spread betting broker will give you the option of adding more money to your margin account. For example, if you added a further £200, this would require the price of Apple stocks to decline by an additional £200 before your trade is closed.
On the flip side, if you opted against adding more funds to your margin, and your Apple trade hit that 10% liquidation trigger price, the broker would close your trade and retain your £500 margin.
The good news is that you can install a stop-loss order to ensure you never get liquidated. Instead, you can opt to exit your spread betting trade when the asset goes against you by a smaller amount. For example, instead of having your trade closed at the liquidation rate of 10%, you could put your stop-loss order in at 2%.
Here’s how a stop-loss order works in practice when spread betting:
As per the above, a ‘worst-case-scenario’ would be Apple stocks going down in value by 2%. If it did, you would lose £200 and the trade would be closed (2% of £10,000 trade size). Although you still lost money, if the stop-loss order wasn’t in place, you could have potentially lost your entire margin – which is £1,000.
Unlike traditional stocks, CFDs, or forex – spread betting profits are usually exempt from tax. This is because the industry is viewed as gambling, as opposed to conventional trading.
As such, if you live in a country where gambling winnings are tax-free, this is hopefully the case with spread betting, too. However, you are strongly advised to check this with a tax specialist in your respective country.
If you’ve read our guide up to this point, and you think that spread betting is right for long-term investment goals – we are now going to show you what you need to do to get started today.
If you want to spread bet online, you will need to find a suitable broker. Most spread betting platforms also support CFDs, so you’ll likely be using a hybrid site.
Nevertheless, with dozens of spread betting sites active in the online arena, you need to ensure that the platform is right for you. This should include metrics like regulation, payment methods, tradable instruments, fees, and customer support.
To help you along the way, we’ve listed our top five spread betting brokers of 2021 towards the bottom of this page.
Once you have found a spread betting platform that meets your needs, you will then need to open an account. Much like any other investment site, the process will require some personal information from you.
As spread betting is a sophisticated investment arena, the broker will likely ask you some multiple-choice questions to gauge your prior experience. This is to ensure you fully understand the risks associated with spread betting.
Before you can place your first spread betting trade, you will need to verify your identity. In most cases, you can do this by quickly uploading a clear copy of your passport or driver’s license.
Some brokers will also ask for a proof of address. If they do, you can upload a recent bank account statement or utility bill.
You will now be asked to fund your spread betting account. Most platforms will ask you to meet a minimum deposit amount – which is usually in the £50-£150 range.
In terms of deposit options, this often includes the following:
Apart from the bank account transfer option, deposits are usually credited to your spread betting account instantly.
Once you have deposited funds, you can then place your first spread betting trade. You can browse the many spread betting markets offered by the broker, or simply enter the financial instrument into the search box.
Once you’ve found the asset you wish to trade, you’ll need to set up an order.
Once your trade is live, you can close it at any point by placing an opposite order. For example, if you went long, place a short order to close the trade – and visa versa.
Want to start spread betting right now, but not sure which platform to use? Below you will find our top five spread betting sites of 2021. All of our top-picks are heavily regulated, give you access to thousands of financial instruments, and allow you to easily deposit funds with a debit/credit card.
Our top pick goes to IG. launched in 1974 - the UK-based broker offers CFDs, forex, and spread betting trading. In fact, you'll have access to over 17,000 individual markets, which is huge.
As such, whether you're looking to spread bet currencies, stocks, indices, and gold - IG likely has a market for you. Minimum deposits start at £250, and you can fund your account with a debit/credit card or bank account. The platform is regulated by licensing bodies in the UK, Singapore, and Australia.
Spreadex is a specialist spread betting platform that covers traditional financial markets and sports.
With more than 10,000 indicidual spread betting instruments, most asset classes are covered. You can place a spread bet from just 10p per point, and minimum deposits start at £1. Multiple payment methods are supported, and the broker holda a license with the UKs FCA.
Much like IG, City Index is a multi-purpose broker that covers CFDs, forex, and spread betting. You'll have access to just over 8,000 markets, and spreads are super-competitive.
The UK-based broker is regulated on multiple fronts, and it has a long-standing reputation that dates back to 1983. You can open an account in minutes, deposits start at £100, and supported payment methods include a debit/credit card or bank transfer.
CMC Markets offers a highly comprehensive spread betting facility. This includes thousands of market across stocks, indices, ETFs, energies, hard metals, and even cryptocurrencies. Launched in 1989, CMC Markets is heavily regulated.
On top of super-low commissions and fees, CMC Markets offers a number of risk management tools. This will ensure that you keep your spread betting losses to a minimum.
FXCM is a low-cost spread betting broker that allows you to place trades at just 7p per stake. This is perfect if you are just started out in the space and wish to begin with smaller stakes.
The broker holds multiple regulatory licenses, and it also supports CFD and forex trading. Several payment options are offers, and account applications are usually approved on the spot.
We hope that by reading our guide in full you now have a 360-degree view of how spread betting works. We’ve covered everything from how you can win and lose money when spread betting, the many financial instruments that you can trade, and what risk management tools you can install to mitigate your potential losses.
Ultimately, while spread betting won’t be for everyone, it does offer a number of benefits over traditional investment channels. At the forefront of this is commission-free trades that are often exempt from tax – and spreads that remain unrivaled in other investment arenas.
Crucially, just make sure that you understand the underlying risks of spread betting before taking the plunge. After all, most newbie traders lose money when they first start out, so do tread with caution.
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Spread betting platforms usually give you access to same assets that you would trade via CFDs. This will include everything from stocks, indices, commodities, interest rates, ETFs, and cryptocurrencies.
The overarching concept is to assess whether an asset will increase or decrease in value against its current market price. For each 'point' that you are correct, you win an amount proportionate to your stake.
This is the difference between the 'long' and 'short' price of the asset - and it's stated in points. For example, if the difference is 5 points, you need to make at least 5 points just to break even.
Yes, spread betting is regulated much in the same way as the CFD or forex space. Key regulators include the FCA (UK), ASIC (Australia), and CySEC (Cyprus).
Profits are based on your initial 'stake-per-point', and the number of points your trade gained. For example, if you sold Apple stocks at 200 points higher than you originally paid, and you staked £5 per point, you would have made £1,000.
If your trade goes against you by a percentage equal to your margin, your trade will be liquidated. For example, if your margin is 5%, and the value of your trade goes down by 5%, your trade will be closed and the broker will keep your margin deposit.
At a minimum, spread betting sites usually give you the option of depositing funds with a debit/credit card or bank account. Some also permit e-wallets like Paypal and Skrill.
Samantha is a UK-based researcher and writer that specializes in all-things finance. This covers everything from traditional equity and fund investments, to forex and CFD trading.
Samantha has been writing financial-based content for several years and has a variety of publications in the online domain. Crucially, she is able to explain complex financial subjects in a newbie-friendly manner.
Any news,messages, opinions, charts, prices, analyses, or other info on this website shouldn’t be taken as a piece of investment advice but provided as general information for entertainment and educational purposes. The site should not be wholly relied on for extensive research before making personal trading decisions. Any content on this website is subject to change without notice. Learn 2 Trade won’t accept liability for any damage, loss, or profit loss as a result of the use or relying directly or indirectly on such information. We don’t recommend only the use of technical analysis for making trading decisions. Neither do we recommend hurried trading decisions. Always understand that past performance doesn’t guarantee future results.
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