Spread betting is an investment vehicle where traders can bet on the variations in price of an asset in relationship to the difference between the bid and offer price of that asset. Spread betting not only covers the financial markets; it is also possible to spread bet on sporting events and even the weather. Our primary concern here is spread betting on the financial markets.
Spread Betting: Some of the Basics
Spread betting was invented by American trader Charles McNeil. Spread betting is not legal in the US, but it is in many other countries and in the UK as well.
Specifically speaking, spread betting is a form of trading where the spread bettor aims to makes money by predicting if a financial asset will rise or fall from price levels provided by the spread bet broker.
Characteristics of Spread Betting
What are the characteristics of spread betting contracts?
- All assets traded on the spread betting platforms have two prices: a bid and ask price. The difference between both prices is the broker’s commission. The bid price is the price at which a dealer will buy an asset from a trader. In spread betting, the bid price is located above the market price. The ask price is the price at which a dealer will sell an asset to a buyer, and in spread betting, the Ask price is set at a lower level than the market price.
- The trader/spread bettor does not own the underlying asset traded.
- The spread betting market is leveraged. The trader is allowed to open positions far larger than the account capital can, but the trader has to put up a margin collateral for the trade.
- Losses in spread bet are not limited to the amount invested in the trade. Excessive slippage may wipe out positions and even un-invested capital used to cover ongoing losses.
- On the other hand, profits in spread betting are also unlimited, limited only by the extent of price movement and the Take Profit targets set for the trade.
- In financial spread betting, the trade is based on the spread, which is the difference between the bid and the ask prices.
How Spread Betting on Financial Assets Works
Stocks, currencies, stock indices, bonds, interest rate instruments and commodities make up the bulk of financial assets traded on spread bet platforms. Financial spread betting is a leveraged market, so spread bettors can open margin accounts and trade with them, controlling larger positions with a small amount of money.
This is an overview of how money is made in a typical financial spread bet.
The chart above shows how a typical spread bet works. The spread bettor sells the asset if there is an expectation that the asset price will head downwards. The SELL order in this case is initiated at bid price of 107. The market price is at 106 and the ask price is at 105. The spread is therefore $2, and this is the broker’s profit. The asset price drops from 107 to 100, a 7 points gain. The trader will therefore make 7 points X whatever amount was staked on the bet. If $20 was staked on the bet, the income from the trade would be 20 X 7 = $140. The cost of the spread is deducted for the final profit.
How to Participate in Spread Betting
To be able to engage in spread betting, the following process must be followed:
- Select a spread betting broker
- Open a trading account
- Fund the account with an acceptable payment method.
- Trade and withdraw your profits.
There are many spread betting brokers around. Some of them are listed on the website. They are regulated brokers and are safe to use. Opening a trading account is a seamless process and can be done online on the websites of these brokers in a few short steps.
It is also important to use an acceptable payment method to deposit and withdraw funds from the trading account. Credit and debit cards are a very useful option. However, they are not accessible to everyone and therefore traders who cannot use them can use e-wallets and bank wires.