UK Spread Betting: What It Is and How It Works

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, yet high-risk, avenue to bet if the price will rise or fall. As a leveraged derivative, a spread betting broker can offer retail traders up to 30:1 margin on financial markets allowing them to open larger positions.

How Does Spread Betting Work?

Similar to buying shares, financial spread betting involves speculating on market movements and price changes. While a share trader profits by buying and selling actual shares, a spread bet doesn’t require the purchase of an underlying asset. There is also greater flexibility in what one can bet on, as bets can be placed on movements in any direction.

When a trader makes a spread bet such as Tesla stock, the more the underlying asset (the Tesla share price) moves in a direction, the more the trader will make a profit or loss.

Understanding Spread Betting

To better understand spread betting we are looking at four key elements:

• The direction of the trade
• Bet sizes
• Bet Duration
• Leverage and Margin

1.  Going Long Or Short

A trader looking to place a spread bet will first assess market conditions to identify a suitable currency. If the trader believes a currency will rise in value compared to the other currency pair, they would take a long position and go short (sell) if the reverse happens.

2. The bet size of the trade

The best 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.

3. Duration

A spread bet has a fixed timescale 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 duration is known as daily funded bets. They are meant for short-term positions with lower brokerage 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 broker they want to roll over their position. Brokerage is higher but they avoid the overnight funding fees of daily funded bets.

4. Leverage And Margin

Using leverage in spread betting allows traders to maximise profits. By borrowing money from a broker, traders can open larger positions than they might otherwise. If Alex, from our example above, had used a leverage of 3:1, he would have made a profit of GBP 18.00 rather than GBP 6.00.

Leveraged products also carry significant risks, however. Just as they can amplify gains, they can magnify losses. Had Alex not bet correctly that the euro would increase in value, he would have lost GBP 18.00 using 3:1 leverage. Most brokers require that traders deposit a percentage of any leveraged position in cash in case of loss.

Given the risks with leverage, the UK financial regulator (The Financial Conduct Authority) limits retail clients to 30:1 for major currency pairs (eg EUR/USD) and 20:1 for minor and exotic currency pairs. Professional traders can receive up to 500:1 but must first pass a number of pre-requisites. You can view our best spread betting platforms in the UK to compare FCA regulated brokers.

All traders (especially retail traders) who intend to use leverage should ensure that they understand the terms offered by the broker and the financial instrument to be traded.

Financial Spread Betting Examples

Example 1: A Winning Trade

Alex sees that the euro is expected to gain strength on the back of changing economic policies. After logging into his trading account, he reviews the bid-ask spread offered by his broker. Fortunately, the euro has a ‘bid’ price of 1.017 and an ‘ask’ price of 1.019 (a difference of just .02 pips.) Alex places a bet that the euro will increase in value within the next 24 hours and opens a position for GBP 3.00 per pip.

Fortunately, the market moves in his favour, and the euro rises to 1.022 by the expiration of his bet. When Alex closes his position, he makes a profit of .02 points or GBP 6.00.

Example 2: A Losing Trade

In this example, we will use a short trade with the GBP/USD currency pair. The broker is quoting 1.4000, so if there is a 2-point spread, Alex can sell (go short) at 1.3999 and buy (go long) at 1.4001.
Alex believes the GBP will fall against the USD, so he places a sell order of £4 per point at 1.3999.

Unfortunately for Alex, GBP/USD increased to 1.4040, so Alex decided to close his position. The broker is now quoting a 2-point spread with the buy price of 1.4041 and the ‘sell’ price of 1.4039.

The difference between the exit and entry prices is the size of the number of points you lost, meaning a loss of 42 points since this is the result of 1.4041 – 1.3999. To calculate the total loss you multiply £4 per point * – 42 point loss which means Alex lost £168. Learn more on our what is guide.

What Is the Spread?

Brokers will generally quote two prices: the ‘bid’ price and the ‘ask’ price. Pairs with a small difference or ‘narrow spread’ between the bid and ask prices are particularly attractive. The fewer the pips between the bid price and the ‘ask’ price, the better, as traders only profit when the underlying change in price exceeds the spread. Traders will also specify a time when each bet expires.

A broker’s spread is primarily determined by their liquidity providers followed by how much the broker wants to bake into the spread as their fee. This spread essentially represents the cost or commission the broker charges to trade. When it comes to CFDs, the broker may charge lower spreads but a commission which isn’t applicable for a spread bet.

Managing Risk In Spread Management

Many of the same tools traders use in spot forex trading can also protect against catastrophic losses in spread betting. (In the below definitions, we discuss trading above the market.)

Stop-loss orders

A stop-loss order automatically closes your position. UK forex brokers usually include stop-loss orders in their suite of risk management tools. However, some off-shore brokers may not. A few brokers will also allow traders to open guaranteed stop-loss orders, ensuring an order fills at exactly the specified price and preventing surprises due to gapping or slippage.

Limit 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 a trader takes a profit without having to perpetually monitor the markets.

3. Hedging

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 heading risk with a similarly large EUR/GBP position.

Risk management is an important trading skill, particularly for traders intending to use leverage. In addition to resources offered by forex brokerages, a diverse portfolio and well-designed trading strategy can play a critical role in protecting investments.

Margin Calls

It is worth understanding that a broker requires enough funds in the trader’s account to cover their position. If a trade goes against an individual’s 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 the 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.

Spread Betting Benefits

The United Kingdom has the highest popularity of financial spread betting due to the unique benefits permanent residents can derive. A few of the key benefits including:

• No tax on profits
• The ability to trade with leverage
• A wide range of markets to trade
• The ability to go long or short

Below is a more in-depth analysis of core benefits that have led to the increased adoption of spread betting.

1. Tax Benefits

One of the significant advantages of spread betting, particularly for UK citizens, is its 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.

View our spread betting tax guide for a more in-depth discussion about spread bet tax.

2. Access to Global Markets

One of the key benefits of spread betting is its access to a wide range of global markets. From forex trading to commodities, indices, and shares, spread betting allows you to speculate on the price movements of various underlying assets. This means you can take advantage of opportunities in the financial market, whether it’s the stock market or currency pairs. You can even sports spread bet on tennis or the Super Bowl.

3. No Direct Ownership of the Underlying Asset

With spread betting, you’re not buying or selling the underlying asset. Instead, you’re betting on the direction of its price movement. This means you don’t need to worry about the responsibilities and risks that come with ownership, such as storage costs or depreciation.

4. Leverage and Margin

Spread betting is a leveraged product, which means you only need to deposit a small percentage of the full value of your position, known as the margin. This leverage allows you to potentially achieve larger profits from a smaller initial outlay. However, it’s important to remember that leverage can also magnify losses, making it a high-risk strategy.

5. Ability to Go Long or Short

You can place a bet accordingly whether you believe the market will rise or fall. If you think the price of an asset will increase, you can go long (buy). If you believe it will decrease, you can go short (sell). This flexibility allows you to potentially profit from both rising and falling markets.

Spread Betting Strategies

Traders have varying levels of experience and risk tolerance, which means the best spread betting strategy will differ. We’ve included four of the most popular approaches below:

• News-based spread betting. Trading based on news about the global financial markets or FX market and analyst expectations.
• Technical analysis spread betting. Traders use sophisticated algorithms, sometimes called ‘bots’, to spot trends in market movements.
• Breakout spread betting. Traders identify key price points and attempt to enter a trend before it gains momentum and prices rise.
• Reversal spread betting. Traders bet on a bullish or bearish market, opening a position opposite the current trend.

Before implementing a trading strategy, traders should take advantage of backtesting tools and other resources offered by brokers.

Limitations Of Spread Betting

While spread betting offers numerous benefits, it’s crucial to understand the associated risks. One of the primary risks is the use of leverage. While leverage can amplify profits, it can also magnify losses. If the market doesn’t move in your predicted direction, you could lose more than your initial deposit. This high-risk aspect of spread betting makes it essential to have a solid risk management strategy in place.

Another risk is the volatility of the financial markets. Prices of underlying assets, whether currency pairs in forex trading or stocks in the stock market, can fluctuate rapidly. These sudden price shifts can lead to significant losses, particularly if you hold a large position. Additionally, while the Financial Conduct Authority regulates spread betting, there’s always a risk of market manipulation or a betting firm defaulting. Therefore it is crucial to choose a reputable betting broker (most based in London), such as IG Index or CMC Markets.

Spread Betting FAQs

Spread Betting vs. CFDs?

Like forex spread betting, contracts for difference (CFDs) allow traders to speculate on market movements without investing in the actual underlying asset. Both derivatives are legal in the United Kingdom and have specific advantages and disadvantages.

An example is speculating on the Financial Times Stock Exchange 100 Index movement with the option for FTSE spread trading of CFD trading on the same index. The same applies for ETFs on indices such as the FTSE 100 or major shares such as Apple or Microsoft.

Spread betting is generally considered more tax efficient than CFDs, as traders pay no stamp duty or capital gains tax. Because the UK considers spread betting akin to games of chance, any profits are tax-free. Earnings from CFD trading, on the other hand, are subject to capital gains taxes or business income taxes. On the flip side, traders that lose money using CFDs may be able to claim these losses on their tax return, something spread bettors cannot do.

Spread betting also allows traders to avoid commission costs. Reputable brokerages will charge a commission to execute CFD transactions for many account types. For those with minimal capital, spread betting may prove more cost-effective.

Both CFDs and spread betting encourage trading on margin to increase profits, and it’s important to fully understand your risk mitigation strategy before experimenting with either of these financial instruments. View the spread betting vs CFD guide to learn more about the differences between these options.

How Do I Start Spread Betting?

How – and whether – a trader gets started with a beginner forex spread betting broker depends heavily on individual circumstances. Experienced traders may already be familiar with the forex markets, while beginners may need to devote more time to reviewing different forex brokers and learning technical analysis.

1. Research Trading Strategies

Before choosing a broker or trading platform, new traders should read up on different trading strategies for spread betting. The best one will vary from trader to trader and comprise part of a balanced approach to investing.

2. Choose a Spread Betting Broker

As with spot trading, brokerages will offer different combinations of account types and spread betting platforms. Rather than focusing exclusively on trading costs and account fees, traders should also consider risk management tools and the number of trading platforms on offer.

Traders who intend to spot trade forex or other assets, such as indices, should consider our forex broker comparison UK list for their jurisdiction to maximise their opportunities. Spread betting specialists may prefer to pay a premium for a spread betting provider with a trading platform designed specifically for spread betting, such as IG or FxPro. Otherwise, a broker like Pepperstone which has TradingView with advanced charting and trading tools should be considered

3. Select A Spread Betting Trading Platform

Depending on the broker you select, there will be a choice of trading platform. Generally, there are three mainstream trading software programs with MetaTrader 4 (MT4) being the most popular for trading currency, MetaTrader 5 (MT5) the most popular for trading CFDs such as commodities, shares and equities while cTrader is popular for advanced algorithmic trading while TradingView has the best charting software.

One of the brokers we recommend is Pepperstone which in part was because they offer traders any of these four trading platforms. They also have leading customer support and a wide range of forex pairs. Other brokers such as City Index, and FXCM only offer one or two of these options while others have their own platform, like Spreadex, while Accendo Markets offer Traderoom.

Most retail investor accounts require a minimum deposit, and different trading accounts may incur different types of fees.

4. Open a demo spread betting account

Any UK resident can open a free demo spread betting account with no upfront deposit. We recommend this for traders new to trading or new to a trading platform (such as MT5) who may want to get a feel with virtual funds before trading real money. We analysed the best UK spread betting demo accounts and found they were almost identical to our best broker list. The only changes were some brokers offered only limited trading (or time periods) on their demo accounts for which they lost marks pushing them down the list.

Just note that while a demo account is free, you will need to do most of the paperwork before opening it. Brokers require this because demo accounts cost them money to maintain so they want to make sure the individual is serious about trading before opening an account.

5. Trade With A Live Account

Once you select a broker, trading platform and have tested a demo account you may want to start trading with real money. Opening a live account just requires a deposit to be made. At this point, the trader may also want to decide if they will trade on their desktop or mobile device. If the latter, they may want to view our spread betting app page where we tested each broker’s trading app. Alternatively, you may want to test drive each app using their demo account, executing your spread betting strategies without the risk of loss.