Spread betting is based on predictions made by bookmakers specifying the range of possible outcomes of an event. A 'spread' covers the most likely outcomes of an event and consists of two prices, a higher 'buy' price and a lower 'sell' price. If you believe the bookmakers 'buy' prediction will be exceeded you 'go long', conversely if you believe the 'sell' position is too generous and that the outcome will be lower you 'go short'. It is this ability to bet on decreases in an event as well as increases that makes spread betting so popular, especially within financial sectors.
Spread betting can broadly be divided into three categories; finance, sport and novelty. Financial spread betting allows you to benefit from movement within the stock market and other financial indices without having to purchasing stock and is often used to hedge against decreases in share or market value. Sports spread betting can be used to wager on a huge variety of different sporting eventualities from the number of goals scored in a game to the time of the first try in a game of rugby. Novelty spread betting encompasses almost everything else, ranging from seats won in an election to the number of calls taken on a reality TV show? The options really are limitless.
Spread betting works on a margin basis, this means that when you place a bet you only have to hand over a deposit (usually in the region of 10%) instead of the full bet amount. Theoretically this means that you have more money to use in alternative investment opportunities or conversely allows you to stake a larger position on each point in the bet than you would have been able to otherwise (known as gearing). However you must have access to the total amount to cover costs should the bet go against you. Some brokers offer credit accounts for this reason.
As spread betting does not involve placing a fixed stake, but instead works on a pound per point basis (with you specifying the amount per point you would like to play with), the more right you are, the more you will win, consequently the potential profits are uncapped. However this also applies to loss and if the event goes against you, the more wrong you are the more you will owe the bookmaker.
As sports spread betting is a 'live' form of gambling, it is possible for you to open and close bets at anytime throughout an event. This means that if the outcome puts you in a loss making position, you are perfectly entitled to close the bet at any time or to change your preferences. Many brokers offer stop loss accounts which allow you to specify a limit at which the bet will be closed if the outcome moves against you. It is advisable to use this facility (although it may come at a charge) to help minimise potential losses.
As spread betting is classed as a form of gambling under British law due to the risk involved, you do not pay Capital Gains Tax or stamp duty on your winnings. Additionally, bookmaker fees are likely to be minimal if any as theses are included in the spread margin. This means that if you do predict correctly and win a bet, the profits are all your own.
Pros of spread betting: Spread betting can offer a number of advantages over conventional share dealing or fixed odds betting:
Access to markets that are normally restricted to registered brokers, such as foreign exchange trading.
A single account gives you access to a range of markets, including shares, bonds, currencies, interest rates, indices, options and commodities.
No Stamp Duty is payable (payable at 0.5% on traded shares)
No Capital Gains Tax is payable on profits made.
No direct commission or brokerage fees are payable.
It is possible to profit from falling markets.
Profits are theoretically limitless. The 'more right' you are, the more you will profit.
You can 'deal' when traditional markets are closed.
Small bets can be placed.
Bets can be made partially on credit.
A 'stop loss' can be set to limit your liability.
Cons of spread betting: Spread betting does however hold a some potential disadvantages over conventional share dealing or fixed odds betting:
If a bet is closed before the make up is declared you pay for the spread a second time.
Many spread betting markets are very volatile. Unless you place a 'guaranteed stop loss', you can incur very large losses if events go against you.
Losses cannot be offset against capital gains on other ordinary investments.
It is less suited to long term investment as additional costs are often incurred each time the spread bet is extended to a new expiry date.
You have no rights as an investor, including no voting rights.
You will not benefit from dividends.
By researching the subject of your bet thoroughly, using facilities such as stop losses and only playing with money that you can afford to lose, spread betting can be an exciting and highly profitable form of gambling.