Spread Index Betting
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Spread Index Betting
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Spread betting provides a popular way to go long or short on thousands of financial markets, including indices, shares, currencies, commodities and more. Find out what spread betting is – and how it works – with our handy guide.
In this guide, we’re going to cover all the essentials you need to know about financial spread betting. Scroll down to get started at the beginning, or follow these links to skip to a specific section:
Spread betting is a financial derivative that enables you to trade on the price movements of a wide range of markets. Unlike traditional investing, you don’t take ownership of any assets when spread betting – which means you can go short as well as long, take advantage of leverage and more.
Traders use spread betting to get a range of different benefits. Some, for example, will utilise spread bets to trade when markets are falling as well as rising. Others use them to diversify their exposure by trading FX, shares, indices and commodities 24 hours a day from a single account.
Spread betting works using bets instead of the physical buying and selling of assets. In a traditional Apple trade, for example, you’d buy Apple stock, hold it then sell it. When spread betting, you’d achieve the same result by making a bet that Apple shares will increase in price.
The further that Apple moves in your chosen direction, the more profit you make. The further it moves against you, the greater your loss.
When you open a spread bet, you’ll see two prices listed: the buy price and the sell price. Using this, you can choose whether you want to go long or short. If you think the value of your chosen market will go up, you click buy. If you think it will fall, you click sell.
Then, to close a spread bet, you trade in the opposite direction to when you opened it. So if you bought at the outset, you’d sell to exit – and vice versa.
The spread is the difference between the buy and sell prices listed on a market, and it is how you’ll pay to open a spread betting position. Instead of paying a commission, all the costs to trade are covered in the difference between the buy and sell prices.
The FTSE 100, for instance, might have a spread of 1 point. This means that its buy price will be 0.5 points above its current market price, while its sell price will be 0.5 points lower. Your broker’s fees to open and close your position are all contained within that 1-point spread.
Another key aspect to spread betting is your stake, which is also known as your bet size . Selecting a bet size lets you decide how many pounds per point to allocate to each trade, which dictates how much you’ll make or lose for every point that the market moves.
In UK spread betting, you’ll decide you stake using pounds per point. Say you bet £5 per point that Apple stock will go up. For every point of upward movement, your position will earn you £5. If it drops, then the opposite is true.
If you think that the price of oil is going to go up, then you could place a buy trade with a stake of £2 a point.
This will earn you £2 for every point the price of oil rises. However, should the price of oil fall, you would lose £2 for every point of downward movement.
You realise your profit or loss when you close your position. If oil had moved up 50 points from when you bought it, you would make (50 points x £2) £100. If it had moved down 50 points, you would lose £100.
Leverage is another important aspect of spread betting. It means you can put up a small amount of money to control a much larger amount. When spread betting on stocks, for example, you might only have to put up 20% of the total value of your position. This would mean that the market has a leverage factor of 5:1. Other markets, such as forex, may have leverage of 20:1 or higher.
Bear in mind, though, that leverage will amplify your profits and your losses – so it requires careful risk management.
The deposit that you have to maintain in your account to keep a leveraged trade open is called your margin . When you’re trading with leverage, you’ll need to ensure that you always have sufficient margin in your account.
Say that you want to bet £10 per point on the FTSE 100 when it is trading at 6000, with a leverage factor of 20:1. The total size of your position is (10 x 6000) £60,000, so you’d need to put up (5% of 60,000) £3000 as margin.
Learn more about margin and leverage .
Unlike traditional share dealing, with spread betting you can sell a market if you think it’s going to fall in value. In doing so, you can profit from the falling price. This is known as 'going short'. To short a market, you trade at the sell price instead of the buy.
Tesco is trading at 229. You believe that the company’s share price will fall and decide to go short £5 per point at 229.
Tesco announces that it mistakenly overstated its pre-tax profits for the last six months by £250m. After two weeks, Tesco’s share price has plummeted to 168p as shareholders lose confidence in the retailer. You decide to close your trade at 168p.
Tesco stock has fallen 61 points. Your spread bet earns you £5 for every downward point of movement, so your trade would earn you (61 x 5) £305.
However, if Tesco stock had risen 61 points instead, you would lose £305. It’s also worth noting that this illustrative example does not include overnight financing charges .
When spread betting, it is crucial to maintain appropriate risk management. Typically, this involves identifying the risks that you may face when trading, then creating a risk management plan that sets out how to mitigate them for each position.
Stops are an essential tool to control risk. When you place a stop on an open position, you’re instructing your spread betting provider to automatically exit the trade if it moves a certain amount against you. This limits your risk by setting a maximum loss from any given position.
Learn more about spread betting risks .
A popular product for investors, Financial Spread Betting is a way to actively participate in financial markets.
Spread betting may be ideal for investors who want the opportunity to try and make a better return for their money. However, it comes with significant risks to your capital and is not suitable for everyone. We strongly suggest trading on a demo account before you try spread betting on live markets.
Spread betting is ideal for people who want:
City Index offers a choice of over 4000 spread bet markets, including:
You can try out trading on all these markets with a free demo account .
Spread bets are tax free in the UK. That means you don’t need to pay capital gains tax on any profits you make, unlike traditional share dealing. You also won’t have to pay stamp duty.
However, tax laws are subject to change and depend on individual circumstances. Please seek independent advice if necessary.
Spread betting and CFDs are both leveraged products that enable you to speculate on the price movements of financial markets. But they work in different ways.
With spread betting, you bet a certain number of pounds per point on the future direction of a market. With CFDs, you trade a contract in which you agree to exchange the difference in asset’s price from when you opened your position to when you close it.
When you spread bet on shares with City Index, we’ll automatically adjust your open positions to reflect dividends.
If you are long on a company that declares a dividend, we'll credit your account. If you are short, you pay the dividend. This happens before the market opens on the ex-dividend date.
Learn more about corporate actions here .
No, forex and spread betting aren’t the same thing. Forex is an asset class, like shares, indices or commodities. In forex trading, you are speculating on the price movements of currency pairs.
You can use spread betting to trade lots of different asset classes – that includes forex, as well as shares, indices, commodities and more.
It depends on your chosen provider. You should decide exactly how much capital you want to risk before you start trading.
At City Index, we recommend that you deposit a minimum of £100, or however much you need to substantially cover the margin requirement of your first trade. It is prudent to also have enough equity in your account to sustain any significant moves against your position.
No. Day trading is an approach to the markets that involves ensuring that all your positions are closed by the end of the day. Spread betting is a type of leveraged financial derivative.
As day traders only keep their positions open for a short amount of time, they often use leverage to amplify their profits and losses. Spread betting is a popular method of achieving this, but it isn’t the same as day trading.
To hedge with spread betting, you open a spread bet that earns you a profit if an existing open position incurs a loss.
For instance, you might own Barclays shares as part of your investment portfolio. If you're worried about a temporary downturn, then you could sell your shares – but then you'd lose your position on the company.
Or instead of selling your shares, you could open a short spread bet on Barclays. Then, if Barclays’ share price does fall, the loss in your portfolio would be offset by the profit from your spread bet.
Want to learn more about spread betting? Explore these free resources to discover everything you need to know.
Alternatively, open a live trading account now – you can get started in less than five minutes.
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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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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.
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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