Spread Betting: What is Spread Betting and how does it work?
What is spread betting?
Spread betting refers to speculating on the direction of financial markets without actually owning the underlying securities. This involves betting on the price movement of a stock. Spread betting companies set two prices, a bid price and an ask price (also called a spread), and investors bet on whether the price of the underlying security will be lower or higher than the bid price.
In fact, spread bettors have no fundamental guarantees when betting on the spread and are simply speculating on price movement.
Spread betting differs from spread trading, where you take netted positions in two (or more) different stocks and make money if the price difference between the stocks widens or narrows over time.
Understanding Spread Betting
Spread betting allows investors to speculate on the price movements of various financial instruments such as stocks, foreign exchange, commodities, currencies, cryptocurrencies, bonds, etc. In other words, investors place bets based on the belief that the market will go up or down after the bet is accepted. You can also choose your bet amount. It is promoted as a tax- and fee-free asset that allows investors to profit in both bull and bear markets.
Spread betting is a product that uses leverage. This means that investors only need to contribute a small portion of the position value. For example, if your position value is $50,000 and your margin requirement is 10%, you will only need a $5,000 deposit. This magnifies both profits and losses, and investors can potentially lose more than their initial investment.
Due to regulatory and legal restrictions, spread betting is not available to US residents.
Risk management in Spread Betting
Despite the risks associated with high leverage, spread betting can be an effective tool for limiting losses.
Standard Stop Loss Order: A Stop Loss order reduces risk by automatically exiting a losing trade when the market crosses a specified price level. With a standard stop loss, your order will exit at the best available price once the specified stop loss value is reached. Especially in situations of high market volatility, it is possible for a trade to close at a level worse than the stop level.
Guaranteed Stop Loss Order: This type of Stop Loss order guarantees that the trade will close at the exact value you specify, regardless of underlying market conditions. However, insurance against this type of negative impact is not free. Guaranteed stop loss orders usually require an additional commission from the broker.
You can also reduce risk through arbitrage, betting in two directions at once.
Example of a Spread Betting
Suppose the ABC stock price is $201.50 and a fixed spread betting company offers investors a $200/$203 buy/sell trade. The investor is bearish and believes that ABC will fall below $200, so they execute a sell order at $200. They decide to bet $20 per point if the stock price falls below the trading price of $200. If the price of ABC falls to the level bid/ask of $185/$188, the investor can exit the trade and make a profit of {($200 - $188) * $20 = $240). If the price rises to $212/$215 and you decide to exit the trade, you will lose {($200 - $215) * $20 = -$300).
Spread betting companies require a 20% margin. This means that the investor must deposit 20% of the position value at the time of creation, {($200 * $20) * 20% = $800, into the account to cover the adjusted profit. amount. The position value is calculated by multiplying the stake amount by the offer price of the shares ($20 x $200 = $4,000).
Benefits of Spread Betting
Long and Short
Investors can bet that prices will rise and fall. If an investor is trading physical shares, he or she may need to borrow the shares to sell short, which can take a lot of time and money. Spread betting makes short selling as easy as buying.
No Taxes
Spread betting companies make money from the spreads they offer. There are no separate commissions, making it easier for investors to monitor trading costs and calculate position sizes.
Tax Benefits
In some tax jurisdictions, spread betting is considered gambling and therefore the profits made may be taxed as dividends rather than capital gains or income. Spread betting investors should keep records and seek advice from an accountant before paying taxes.
Spread betting can be very tax efficient depending on where you live, as the tax on winnings in some countries is much lower than the tax on capital gains or trading income.
Spread Betting Limits
Investors who do not understand the meaning of leverage may enter into trades that are too large for their accounts, resulting in margin calls. Investors should not risk more than 2% of their invested funds (deposit) in a single trade and should always be aware of the value of the position they are about to place.
During periods of high volatility, spread betting companies may widen spreads. This may trigger your stop loss and increase your trading costs. Investors should be cautious when placing orders immediately before a company's earnings or earnings report.
Comparison of Spread Betting and CFDs
Many major betting platforms also offer trading in a similar type of contract, contracts for difference (CFDs). CFDs are derivative contracts that allow traders to bet on short-term price movements. Although physical delivery or delivery of securities in a CFD is not possible, the contract itself has transferable value during its term. Thus, a CFD is a traded security created between a client and a broker to exchange the difference between the initial price of a trade and the value when the trade is settled or cancelled.
Although CFDs allow investors to trade the price movements of futures contracts, they are not futures contracts themselves. CFDs do not expire at a predetermined price, but trade at bid and ask prices like any other security.
In contrast, spread bets have a fixed expiration date from the time the bet is first placed. CFD trading also requires upfront payment of fees and transaction fees to the provider. In contrast, spread betting companies do not charge fees or commissions. When a contract is concluded and a profit or loss occurs, you will need to borrow money from an investor or a trading company. In case of a profit, the CFD trader receives the net profit from the closing of the position minus the opening and commission fees. Wins on spread bets are the change in basis points multiplied by the amount specified in the initial bet.
CFDs and spread betting pay dividends when you enter into long-term contracts. Spread bet providers and companies will pay dividends if the underlying asset pays dividends, even though they do not directly own the asset. Investors are subject to capital gains tax if they make profits from CFD trading, but profits from CFD betting are generally tax-free.
What is spread betting?
Spread betting is a way to bet on changes in the price of a stock, index, or asset without actually owning the underlying product.
Do you bet on spread gambling?
Spread betting can be used for leveraged speculation, but it can also be used to hedge existing positions or make informed, directional trades. As a result, many participants prefer the term "spread trading". From a regulatory and tax perspective, this may be considered a form of gambling in some jurisdictions as the underlying instrument does not reflect the actual position.
Is spread betting legal in the US?
Most brokers in the US do not offer spread betting. This is because it is illegal in many US states or may be subject to public regulatory oversight. As a result, large-scale betting has become a very rare activity in America.
Conclusion
Spread betting is a form of speculating or betting on the direction of financial markets without actually owning the underlying asset. Instead, players bet on potential changes in stock prices. Spread betting companies estimate the buy and ask prices, or spreads, and investors bet that the price of a stock will be below or above the buy price.
