What is it?
Financial spread betting is a type of investment trading that does not require you to own the underlying asset you are trading with.
It is also a leveraged investment, which means you only need to put down a small percentage of the amount you want to trade with to open your position.
It is when you commit to starting a trade. Once your position is open, your trade is active.
How does it work?
You bet on whether you think the price of a market will go up or go down.
If you think the price will go up, you buy
If you think the price will go down, you sell
If you are wrong, you lose, and if you win, you could make a profit.
To make a profit, the price movement needs to be bigger than the value of the spread.
What is the spread?
Each market has a different price when you buy or sell, the difference between the two figures is the spread.
For example, a buy price of 6801 and a sell price of 6800 has a one point spread, meaning the market has to move by more than this in your favour for you make a profit.
Multiply every point difference by your stake to work out your profit or loss.
Look for a broker that offers the smallest spread across the market you want to bet on.
Profit and loss explained
To calculate your profit or loss you have to look at the price you opened your position with; either the buy or sell price.
The more the market moves in your chosen direction, the more profit you could make
If the market moves the other way, the bigger the movement the bigger the loss
The price movement has to exceed the size of the spread before you can make a profit.
For example, if the FTSE sell/buy price was 6800/6801 and you buy, here are some possible outcomes:
|Buy price||Sell price||Point difference||Outcome|
And if you sell instead, here are the possible outcomes:
|Sell price||Buy price||Point difference||Outcome|
What are the costs?
The size of the spread will be the cost of trading in a market, the bigger the spread the higher the cost of spread betting.
Some brokers may also charge:
Credit card fees
No, there is no Stamp Duty or Capital Gains Tax liable when you make a profit on financial spread betting.
What is the margin?
It is the amount of money you must have in your spread betting account before you can open your position.
This is usually a percentage of your position's value, for example:
You want to put a £20 stake down on the FTSE 100, with a buy price of 6801
This position would be worth £136,020 (£20 x 6801)
The margin will be a percentage of the position, such as 1%
This means you will need £1,360.20 available in your account to make a £20 stake
The margin acts as a deposit, so if the market goes against you there will be a set amount to help settle any losses. Your losses could still exceed your deposits.
Types of margin
There are two types of margin:
Initial (deposit) margin: the minimum amount of money you need in your account before you can open your position, usually a percentage between 0.5% and 30%.
Variation margin: your broker could ask for more money if your losses are close to exceeding your margin.
What can you bet on?
You can open a bet on several markets, including:
Indices: Exchanges like the FTSE 100, DAX 30 and US 30
Forex: Currency pairs like euro/US dollar and British pound/US dollar
Stocks: Shares in companies like Barclays, BP, Microsoft and Vodafone
Commodities: Metals like gold and silver
Spread betting FAQs
What is a spread?
You have a buy and sell price, the difference between the two figures is known as the spread.
Is financial spread betting regulated?
Yes, all UK based spread betting companies are regulated by the Financial Conduct Authority.
Is spread betting gambling?
No, spread betting is a form of investment trading. Although you bet on how the markets will perform, it is not legally gambling.