Spread Betting Explained Stock Market

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Dan Blystone is the founder and editor of TradersLog.com, as well as the founder of the Chicago Traders Meetup Group.
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.
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.
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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Options Trading Strategy & Education
Spread betting refers to speculating on the direction of a financial market without actually owning the underlying security.
A seller is any individual or entity, who exchanges a good or service in return for payment. In the options market, a seller is also called a writer.
Index arbitrage is a trading strategy that attempts to profit from the differences between actual and theoretical prices of a stock market index.
A box spread is an options arbitrage strategy that combines buying a bull call spread with a matching bear put spread.
Put-call parity is the relationship between the price of European put and call options with the same underlying asset, strike price, and expiration.
A leg is one component of a derivatives trading strategy in which a trader combines multiple options contracts or multiple futures contracts.
Investopedia is part of the Dotdash publishing family.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when spread betting and/or trading 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.
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In this article, we’ll explain the essentials of spread betting, including strategies, tips and examples of a spread bet. This article should guide you towards understanding if spread betting is a suitable trading method for you. Watch the video below to get started.

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Spread betting is a tax-efficient* way of speculating on the price movement of thousands of global financial instruments, including forex​, indices, commodities, stocks, shares and treasuries. Spread betting is one of the most common ways to trade on price action over several asset classes. As it is a financial derivative product, spread betters can trade in both directions (‘buy’ or ‘sell’), and can make use of financial leverage to increase their trade exposure. With a spread betting account, you can choose between trading from home and on-the-go, as our platform is very flexible for traders of all experience levels.
With spread betting trading in the UK, you don't buy or sell the underlying instrument (for example a physical share or commodity). Instead, you place a spread bet based on whether you expect the price of an instrument to go up or down. If you expect the value of a share or commodity to rise, you may open a long position (buy). Conversely, if you expect the share or commodity to fall in value, you may take a short position (sell). You will make a profit or loss based on whether or not the market moves in your chosen direction.
With spread betting, you buy or sell a pre-determined amount per point of movement for the instrument you are trading, such as £5 per point. This is known as your spread bet 'stake' size. This means that for every point that the price of the instrument moves in your favour, you will gain multiples of your stake times the number of points by which the instrument price has moved in your favour. On the other hand, you will lose multiples of your stake for every point the price moves against you. Please note that with spread betting, losses are based on the full value of the position. See our spread betting examples for more information on how to spread bet.
The difference between the buy price and sell price is referred to as the spread. This is where a broker's commission is made, as the buy price will be slightly higher and sell price slightly lower than the underlying market's price. Say for example, GBP/USD's underlying price is trading at 1.37600 with a 1-pip spread, the buy (bid) price would be 1.37605 while the sell (offer) price would be 1.37595. Spreads can fluctuate depending on the price and volatility of an asset, as well as supply and demand.
 As one of the leading providers of spread betting in the UK, we offer consistently competitive spreads. See our range of markets for more information about our spreads.
Spread betting is a leveraged product, which means you only need to deposit a small percentage of the full value of the spread bet in order to open a position (also called margin trading​). While margined (or leveraged) trading allows you to magnify your returns, losses will also be magnified as they are based on the full value of the position.
As an example, our margin rates for indices start at 5%. This means that you only have to deposit 5% of the asset's full value in order to open a position, allowing you to trade with 20x leverage. This is equivalent to a 20:1 leverage ratio.
Many investors choose to spread bet on the financial markets as there are advantages of spread betting over buying physical assets:
You can sell (go short or short sell) if you think the price of an instrument is going to fall
You can trade on margin, so you only need to deposit a small percentage of the overall value of the trade to open your position. Remember, this means that your potential return on investment is magnified, as are your potential losses
Spread betting profits are tax-free* in the UK
You can trade on indices, forex, commodities, global shares and treasuries
There is no separate commission charge to pay on spread bets
You get access to 24-hour markets
There is no stamp duty* to pay
Before placing your trade, remember to make sure that you have followed risk-management guidelines as part of your strategy. There are a number of risks that come with spread betting, including the use of leverage, which can lead to margin calls or account close-outs. You are also subject to spread betting costs such as overnight fees. Read more about the risks of spread betting before entering into a potentially risky position.
A spread-betting strategy is a pre-determined plan that helps you to define your market entry and exit points, and accompanying risk-management conditions such as stop-losses. When utilising a trading plan as part of your wider trading strategy, you aim to create a process in which you can monitor and look to potentially forecast trade outcomes.
When trading with a spread betting account, it may be good practice to outline and follow your own trading strategy template relative to your needs. Strategy templates help to define a set of rules you should follow for every trade, helping you to remove emotions and irrational responses from your trading strategy. This helps to keep consistency within your trades and can help improve your trading mindset. Visit our article on creating a trading strategy template​​, where you can follow an example to help define your strategy.
Spread bet on over 10,000 financial assets
Every trader utilises different methods and strategies to suit their trading style. There are, however, some common spread betting tips a trader can utilise in order to maximise their trading potential:
Create a relevant trading plan and stick to it
Keep emotions aside from your trading
Evaluate market analysts’ news and write-ups as part of your analysis
Be aware of the macro environment through news outlets
Avoid recommendations and tips from unreliable sources, such as internet forums
Cut your losses short and let your profits run
Test new strategies on your spread betting demo account
See our article on spread betting tips and strategies, where we cover the topic in more depth.
Open a spread betting demo account or live account. Accounts can be opened via our website or spread betting app. Deposit funds if you have chosen to open a live account.
Research financial instruments to trade. Browse our news and analysis section, and check the insights, market calendar and chart forum platform modules. Live account holders can also access Reuters news and Morningstar fundamental analysis for inspiration.
Go long and 'buy' or go short and 'sell'. Go ahead and ’buy’ the asset if you think the price will rise, or ’sell’ the asset if you think the price will fall.
Follow your spread betting market entry and exit strategy. Based on your trading plan, enter the market at a defined time, and use your risk mitigation strategies like stop-loss orders.
Enter your position size and place your trade. When placing a spread bet, be aware of the full trade value, and don’t forget to add stop-loss and take-profit orders.
Monitor your trade. Keep track of the open trade on your mobile or PC, and close the position as defined in your trading plan.
It's a good idea to keep up to date with current affairs and news because real-world events often influence market prices. As an example, let's look at the UK government’s help to buy housing scheme.
Many believed that this scheme would boost UK home builders' profitability. Let's say you agreed and decided to place a buy spread bet on Barratt Developments at £10 per point just before the market closed.
Let's say that Barratt Developments was trading at 255 / 256 (where 255 is the sell price and 256 is the buy price). In this example, the spread is 1.
Let's assume that you opened a long position at £10 per point because you thought the price of Barratt Developments would go up. For every point that Barratts' share price moved up or down, you would have netted a profit or loss multiplied by your stake amount.
Let's say your spread betting prediction was correct and Barratt Developments' shares then rose to 306 / 307. You decide to close your buy bet by selling at 306 (the current sell price).
The price has moved 50 points (306 sell price – 256 initial buy price) in your favour. Multiply this by your stake of £10 to calculate your profit, which is £500.
Unfortunately, your spread betting prediction was wrong and the price of Barratt Developments' shares dropped over the next month to 206 / 207. You feel that the price is likely to continue dropping, so to limit your losses you decide to sell at 206 (the current sell price) to close the bet.
The price has moved 50 points (256 – 206) against you. Multiply this by your stake of £10 to calculate your loss, which is £500.
Learn more about spread betting for beginners and how to get started and see our detailed spread betting examples. Watch our spread betting tutorial using the Next Generation platform. If you're
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