The UK is the most popular country to spread bet allowing residents to speculate on the rise or fall of financial markets. Find out why you may choose spread betting over trading CFDs and what to consider before trading.
Spread bets allow you to speculate on the rise or fall of financial markets in the form of a bet. This type of derivative has the added advantage of allowing you to use leverage with your bets and avoid capital gains taxes on your profits. Spread betting is a popular alternative to CFD trading.
In this page, I will explain what spread betting is, how spread betting works. I will also look at its benefits and why you may or may not wish to consider it over trading CFDs, a popular alternative leveraged product.
What Is Spread Betting?
Financial spread betting in the UK is a tax-free way to speculate on the future price movements of assets like forex, indices, or stocks. As you don’t own the underlying asset, a spread bet offers a flexible avenue to bet if the price of the asset will rise or fall.
As a leveraged derivative, a spread betting broker allows retail traders (bettors) to use less of their own funds while increasing the size of their betting position. As a retail trader (bettor) major pairs can have leverage up to 30:1 leverage (or 3.33% margin) and 20:1 (5%) for minor and exotic pairs) by way of example. The maximum leverage for other financial markets will vary.
Brokers and spread betting firms can legally offer spread betting using financial instruments to their clients in the UK provided they hold a licence from the Financial Conduct Authority (FCA).
Types Of Investment Assets
With spread betting being a derivative, it is possible to bet on a range of markets. As long as you have an asset to use as the underlying instrument that allows you to source market prices, spread betting can occur.
Examples of spread betting instruments include:
- Hard (i.e. metals – gold, silver, energies – gas, oil)
- Soft commodities (i.e. coffee, soy, cocoa)
I personally prefer to bet on stocks and indices when spread betting. It allows me to trade international shares and indices in GBP (instead of USD for US shares), which protects me from currency fluctuations (another benefit of spread betting). Especially if the USD strengthens against the GBP, then it would affect my overall PnL.
How Does Spread Betting Work?
Financial spread betting involves speculating on market movements and price changes of an underlying financial instrument usually with the use of leverage (or margin).
The key word is underlying, while you can profit by buying and selling whole assets like shares, a spread bet doesn’t require the purchase of the asset itself which is the underlying asset. Trading whole assets also does not typically use leverage.
Spread betting also differs from contracts for difference (CFD), another leverage tool based on underlying assets. The main difference to note is that spread betting does not require the use of contracts, it is just a bet (so has different tax implications).
Unlike buying assets or CFDs, you can bet in either direction a market will move and make a profit if your bet proves true. The more the market moves in that direction, the more you can profit.
If you believe the market will go up then you place a ‘buy’, while if you think the market will fall you place a ‘sell’ order. To close the bet, you order in the opposite direction to what you opened the bet on. So if you ‘sell’ to open the bet, you would buy to close the position.
1. Going Long Or Short In Spread Betting
Before placing a spread bet, you should first assess market conditions to identify a suitable currency. If you believe a currency will rise in value compared to the other currency pair, you would take a long position and go short (sell) if the reverse happens.
To better simulate going short or long try our exclusive spread betting calculator where you can simulate a position and other components of a spread bet.
2. Size and Duration
The bet size (sometimes called ‘stake’ size) will affect how much profit or loss you will make. Every point that the price moves will multiply how much you gain or lose from the bet. So if your bet size is £10 per point, the value of your profit or loss will increase or decrease by £10. When I first started spread betting, I started off small with 50p per point bets, which was ideal as it allowed me to get used to how spread betting worked.
A spread bet has a fixed time scale before the position expires. This ranges from a day to several months but it should be noted that a position can be closed at any time markets are open before the expiry time.
The most common spread bet duration is known as daily funded bets (DFBs), which I stick to DFBs when I have a short-term view on the markets. They are meant for short-term positions with lower spreads but if left open are subject to overnight funding.
Quarterly bets are less common and expire at the end of each quarterly period unless the trader notifies the forex spread betting broker they want to roll over their position. The spreads are higher but they avoid the overnight funding fees of daily funded bets.
3. Leverage And Margin
Using leverage in spread betting allows traders to maximise profits. By borrowing money from a forex broker, you can open larger positions than you might otherwise. This is attractive as you can get leverage up to 1:30 as a retail trader, which means for every £1 you put up as capital, the forex broker will give you £30. So a £100 margin would allow you to control £3,000 worth of an asset.
Leveraged products also carry significant risks, however. Just as they can amplify gains, they can magnify losses. As much as I like leverage, it is important to understand it and not to over-leverage when you begin.
Given the risks with leverage, the spread betting UK financial regulator (The Financial Conduct Authority) limits retail investor accounts to 30:1 for major currency pairs (e.g. EUR/USD) and 20:1 for minor and exotic currency pairs. Professional spread bettors can receive up to 500:1 but must first pass a number of prerequisites.
Margin is the amount of funds you need in order to open a position with a spread bet. The margin will increase the more you want to stake but equally will decrease if you place a stop loss. For example, if you are required to have a margin of £200 to open the trade at £2 per point, but you place a 10-point stop loss, the margin will reduce to £20. Learn more on the topic with our page dedicated to explaining spread betting margin.
Spread betting is very popular in the UK, so there are plenty of brokers that offer markets. The spread betting firm provides access to the markets and its trading platform so you can trade them. If you are not sure which spread betting company to choose, then you should read our best spread betting broker list.
Examples: Spread Bet vs Stocks vs CFDs
Spread betting is similar to CFD trading however, the way you trade a contract is by declaring how much you want to stake per point you are correct. Whereas with shares and CFDs, you trade based on the contract size. It’s a very simplified approach to trading where you don’t have to figure out the pip value personally.
For example, if you wanted to buy EURUSD you would enter your stake as £1, which means you will profit £1 for every 1 pip the EURUSD moves in your favour. So if you bought EURUSD at 1.0190 and it rose to 1.0205, you would have made £15 profit (tax-free). This is what makes spread betting more appealing to me (and other traders) compared with investing in shares or trading CFDs.
2. Stock Market Trade Example
While spread betting and CFD trading use leverage to trade, buying and selling shares do not. If you want to invest in Vodafone, you will outright own the shares and are subject to capital gains tax and stamp duty. However, you will not have to pay any nightly fees (swaps) to keep the trade open.
If you purchase 1000 shares in VOD (Vodafone) at 80p, you would have to put up the full amount which is £800, then you would be charged a commission (normally 1% or a fixed fee), then stamp duty at 0.5%. So, to buy 1000 VOD shares, you would have to pay £812.
If the market rises in your favour, you can sell the VOD shares to the market. The VOD shares have risen to £1 (100p), making you a nice 20p profit per share before costs and taxes.
After selling 1000 VOD shares at £1.00 you will have received £1000 before costs, and the spread betting share broker charges 1% (£10 commission), leaving you with £990 and £190 profit. The £190 made is subject to capital gains tax that can be up to 20% of the profits.
Learn more about contracts for differences with stocks on the share CFD trading page.
3. CFD Trade Example
In this example, you are buying 10,000 shares in VOD but with trading CFDs you can use leverage just like spread betting. So, instead of paying 10,000 x 80p (£8,000) – you pay a fraction of the cost, and the broker will loan you the rest. Most CFDs allow leverage of up to 1:10 in shares, so you can put down £800 in margin to control 10,000 shares of VOD.
The broker charges a commission to enter the trade (0.1%) that is based on the total value and not your margin value (so the commission is charged on £8,000 and not £800), so your total costs to trade 10,000 shares in VOD is £808 (with CFDs you do not pay stamp duty.)
VOD had a bullish run after stellar earnings and is now worth £1 per share, netting 20p profit per share. Because you control 10,000 shares of VOD this results in a profit of £2,000 (while only putting £800 towards it), netting a strong profit.
When you close the position on a profit, you will pay a commission of 0.1% on the whole position which is now £10,000 making the commission £100. In addition, you will be subject to CGT which could be up to 20% of the profit made. With a 20% CGT, your overall profit would be:
£10,000 – £8,000 – £100 – £8, giving you a net profit of £1,892 before tax. You can see that you generated 10x the profit on VOD with CFDs as opposed to buying the shares. This difference in profit demonstrates how leverage can make a big difference when betting however it is worth noting that if VOD went down 20p instead then you will have lost the £2,000.
Managing Risk In Spread Management
1. Standard stop-loss orders
A stop-loss order automatically closes your position. A UK broker usually includes stop-loss orders in their suite of risk management tools. However, some off-shore brokers may not. I recommend you learn how to spread bet with stop-loss orders as they can limit your exposure to the markets and therefore help prevent some losses.
2. Guaranteed Stop-Loss Orders
The key difference between guaranteed stop loss orders (GLSOs) vs. stop loss orders is that standard stop loss orders can get slipped, which can end up costing you more money.
Whereas with GLSOs, you pay a small premium for the broker to take you out at the GSLO price no matter what (you do not pay this premium if the GLSO is not used).
This is useful if you want to have peace of mind when it comes to being stopped out and protecting your account. Especially in volatile markets when a standard stop loss could easily get slipped 5+ pips and end up costing you more. There are plenty of times when I have slipped in a falling market by 10+ pips, and I regret not taking the GSLO.
3. Take profit orders
A limit order automatically closes a trader’s position if the currency price rises to a pre-set point. Using limit orders can help ensure that you make a profit without having to monitor the markets all day.
Hedging refers to the practice of limiting risk by opening opposing positions to balance wins and losses. Assume that when the value of the dollar rises, the value of the euro falls. In that case, a trader who opens a large USD/JPY position might protect against large losses by hedging risk with a similarly large EUR/GBP position.
5. Margin Calls
It is worth understanding that a broker requires enough funds in your account to cover their position. If a trade goes against your bet, the broker may automatically close off the position (known as a margin call). For this reason, it’s worth understanding the margin call requirements set by the broker and keeping a close watch on open positions relative to the funds in your account.
All FCA-regulated brokers have negative balance protection. This means that in extreme cases where a losing position loses more than the trader’s deposit, the broker will wear the difference. This is another reason why only an FCA-regulated spread betting platform should be considered when comparing brokers.
Benefits Of Spead Betting
Financial Spread Betting Is Gambling
The United Kingdom has the highest popularity of financial spread betting due to the unique benefits permanent residents can derive.
One of the significant advantages of spread betting, particularly for UK citizens, is its spread betting tax benefit. In the UK, spread betting is classified as a form of gambling rather than a traditional investment. As a result, profits from spread betting are not subject to Capital Gains Tax (CGT). Therefore, any profits you make from your spread betting activities are yours to keep in full. Additionally, there’s no Stamp Duty to pay on transactions, which is a further benefit compared to conventional trading.
Other key benefits include:
- The ability to trade with leverage
- A wide range of markets to trade
- The ability to go long or short
View more of the pros on our spread betting advantages guide.
Strategies For Spread Betting
One of the advantages of spread betting strategies is that you can use the same strategies as you would normally trade on CFDs, so you wouldn’t have to develop anything new.
Spread Betting Arbitrage
Spread-betting arbitrage is a strategy to lock in profit by taking advantage of price discrepancies across different brokers. The arbitrage makes the trade risk-free and is very attractive for traders to try to learn. For you to take advantage of this strategy, you would need to have a trading account with several brokers with MetaTrader 4 and have funds to cover the arbitrage in each of them.
An example of how an arbitrage trade works is when one broker offers a EURUSD price at 1.0150 and another broker offers it at 1.0100, you would sell at 1.0150 and buy at 1.0100. This locks in a risk-free return of 5 pips.
With the speed of technology invested by the industry, arbitrage opportunities are rare and require consistent monitoring and instant execution speeds to capture them.
Rights Issues For A Spread Bet
When you’re spread betting, you’re not actually owning the asset. This is similar to CFDs, where you also don’t own the shares but have the right to the profits and losses. Now, let’s talk about Rights Issues. If a company you’re trading with CFDs announces a Rights Issue, you’ve got options. You hold the right, but not the obligation, to buy more shares. So, if you’re not keen on doubling down, you don’t have to. Always a good idea to ring up your CFD broker and see what’s on the table. Trust me, in trading, knowledge is your best asset.
Origins Of Spread Betting
Financial spread betting was introduced to traders by IG Group ( also known as IG Markets and IG Index) in the 1970s by an investment banker called Stuart Wheeler. The first spread betting market in the UK was used to speculate on the price of gold, but over the years, it has expanded and can now be traded on any market from forex to stocks with binaries more popular in the the early 2010s.
Frequently Asked Spread Betting Questions
What can I spread bet on?
You can spread bet on a range of financial markets including forex, indices, stocks, commodities and bonds. Any financial markets really since all that is required is an underlying instrument to use for pricing when betting.
How are spread bets taxed?
In the UK, spread betting is exempt from capital gains tax and stamp duty because it is listed as a gambling product instead of an investment vehicle.
What is the difference between spread betting and CFDs?
The core difference between spread betting and forex trading CFDs is that spread betting is exempt from stamp duty and capital gains tax, which is attractive to traders. While CFDs are only exempt from stamp duty and not CGT.
How do dividends affect spread betting positions?
When a company pays its dividends your trading account will be adjusted to reflect the payments. If you have bought the shares, you’ll receive the dividend to your account to mirror the dividend payment. If you are short then the dividend value will be deducted from your account.
How much do I need to start spread betting?
It is ideal to start spread betting with at least £1,000 to £2,000 if you are a beginner. Although some beginner-friendly spread betting platforms have lower minimum deposits, usually from £0 to £250, it is always recommended to only trade with what you can afford to lose.
Is spread betting the same as day trading?
No, spread betting is not the same as day trading. Spread betting is a derivative of the financial markets like the FTSE 100 that you can trade, while day trading is a short-term trading style you can use to trade the markets, where you only hold positions open during the same market hours.
How can I hedge with spread betting?
You can hedge with spread betting in a number of ways, but the most popular is to hedge against falling share prices. You can use a spread bet to short the share price, which locks in profits and protects them from losses during the downturn. Learn more about hedging with our guide to successful spread betting.
How do I get started with spread betting?
The first place to start is to educate yourself on spread betting, we have you covered with our beginner’s guide to spread betting. When you are ready to get started, you will want to choose a broker, select a trading platform and then sign up for a demo account. View our spread bet tutorial to learn more and there are courses to assist.