What is Spread Betting?
Watch our short introduction to financial spread betting – the tax-free* alternative to trading.
What is financial spread betting?
Financial spread betting is an accessible alternative to conventional trading which allows you to bet whether you think a market will go up or down. You don’t need vast sums of money to spread bet and since it’s often real world events that effect market prices you probably know far more than you think about what drives the markets.
You can spread bet on a huge range of financial markets from all around the world including individual shares, stock indices, commodities and currencies.
With each market you are presented with a ‘buy’ and a ‘sell’ price either side of its real world level, also known as the underlying market. If you think the market will move up you open your spread bet at the ‘buy’ price, also known as going long. If you think it will go down you open at the ‘sell’ price called, going short. The difference between these two prices is the spread.
The more the market moves in the direction you predicted the more profit you make. Conversely, the more the market moves in the opposite direction the more you will lose.
What is the process of making a spread bet?
First, choose your market. Let’s imagine that the price of the FTSE 100 has been falling on fears about economic growth. However, you believe that there are encouraging signs in the economy and the FTSE has fallen too far and is due to rise.
For the sake of convenience, let’s say that the FTSE 100 price is currently 5149/5150. This means the ‘sell’ price is 5149 and the ‘buy’ price is 5150. Because you believe the FTSE 100 will rise you ‘buy’ at 5150.
How much do I bet?
Financial markets are measured in points. You bet a certain amount a point, your stake – for example £2. The amount you win or lose is the difference between the price you open at and the price you close at multiplied by the amount per point that you bet.
Do I need a deposit?
With spread betting you only need a small initial deposit. The exact size of your deposit varies from market to market but in this instance you would need 40 times your stake, which is £80. The deposit is only a small percentage of your total exposure, this is called leverage which is one of the key benefits of spread betting.
It is important to understand that you can lose more than your initial deposit, however, it is possible to cap your potential losses by using a stop order. This mean that the spread bet will be automatically closed if it goes against you by an amount you specify. Please note that only guaranteed stops will protect you from slippage.
How long does a spread bet last?
You may close a bet whenever you want; your profit or loss is determined at this point. If you don’t close it yourself then your bet will close automatically at the end of the set time period at the current market level.
As you anticipated the value of the FTSE 100 starts to rise. After a little fluctuation the price rises to 5275/5276 and you believe that the price will continue to rise – so you hold off from closing the spread bet. However, instead the price falls and your profit starts to drop so you decide to close the bet, at this point the price is 5250/5251, to do this you ‘sell’ at 5250. The difference between the original ‘buy’ price and the ‘sell’ price is 100 points giving you 100 x £2 = £200 profit.
Spread betting provides a tax free* way of trading financial markets with the flexibility to make money when the markets are rising, or falling.
This video was brought to you by IG Index, world leaders in financial spread betting.
* This depends on individual circumstances and may be subject to change in the future. Tax law may differ in a jurisdiction other than the UK.
Ask the expert
If you have a burning question about spread betting or the financial markets, you can ask our Chief Market Strategist, David Jones. David has extensive industry experience, having worked in financial markets for over a decade.
Just log in to Twitter, follow David at www.twitter.com/DavidJones_IG and tweet your question.
Learn more
See our list of spread betting key features for more details, where you can also find further information about how the dealing spread works with our useful diagram.
Spread betting allows you to bet, or take a position, on whatever you think a financial market will do next. The more the market moves in your favour, the more you profit, with unlimited potential. Conversely, the more the market moves against you, the more you could lose – and you may lose more than your initial deposit. However if you choose to take advantage of our risk management tools, you will know your maximum loss in advance.
*This depends on individual circumstances and may be subject to change in the future. Tax law may differ in a jurisdiction other than the UK.
Remember that financial spread betting is a leveraged product and can result in losses that exceed your initial deposit. Spread betting may not be suitable for everyone, so please ensure that you fully understand the risks involved.
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