FTSE Spread Betting Guide

What is FTSE Spread Betting?

FTSE 100 spread betting is a way of speculating on the short-term price movements of the FTSE 100, an index of the 100 largest UK companies listed on the London Stock Exchange. So while spread betting can relate to speculating on price movements of any financial instrument or even sports (in the case of sports spread betting), FTSE spread betting focuses on taking a position of the FTSE index betting on its price movement.

1. Spread Betting Principles

Spread betting is a financial betting strategy that involves speculating on the price movement of a financial instrument, such as stocks, commodities, currencies, or indices.

In spread betting, the bettor does not actually purchase the underlying asset, but instead bets on whether the price will rise or fall. If the bettor’s prediction is correct, he will receive a payout based on the size of the price movement. However, if the bettor’s prediction is incorrect, he will incur a loss.

2. How FTSE Spread Betting Works

In spread betting, a trader doesn’t buy or sell the underlying stocks but rather bets on whether the price will of a financial instrument will go up or down (in this case an  FTSE 100 index). If a trader thinks the value of the FTSE index will rise in value, he or she will “buy” the index. If, on the other hand, the trader thinks it will fall, he or she will “sell” the index.

The difference between the price at which the trader buys the index and the price at which he or she sells it, multiplied by the amount of the bet determines the trader’s profit or loss.

Example 1: A Winning Trade

In this example, we will look at a long position on the FTSE 100.

Mark reads that the Bank of England intends to cut interest rates and predicts that the FTSE 100 index will rise as a result.

After logging into his trading account, he reviews the bid-ask spread offered by his broker. The FTSE 100 has a bid price of 1.017 and an ask price of 1.019. A tight spread with a difference of just .02 pips. Mark places a bet that the market will rise at least within the next 24 hours and opens a position for £3.00 per pip.

Fortunately, the market moves in his favour and the FTSE 100 index 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 look at a short position on the FTSE 100.

In this case, the broker is quoting an ask price of 1.4000. A spread of .02 means Mark can sell (go short) at 1.3999 and buy (go long) at 1.4001. Mark believes the FTSE 100 will fall due to a hike in interest rates, and so places a sell order of £4 per point at 1.3999.

Unfortunately for Mark, the FTSE 100 increases to 1.4040. He decides to close his position, but the broker is now quoting a .02 point spread of 1.4041 and 1.4039.

The difference between the price at which Mark entered and exited his position determines his losses. 1.3999 from 1.4041 comes to -.42 points. Multiplied by Mark’s bet of £4 per point, this means a total loss of £168.

FTSE 100 Spread Betting vs CFDs

No, while it might be tempting to think all of them are similar since they are all forms of trading (yes, even spread betting is, that’s why it is something called spread trading), one should understand how they differ.

Both FTSE 100 spread betting and contracts for difference (CFDs) are derivatives, which means they derive their value from underlying assets. Traders engaged in spread betting or trading CFDs do not purchase that underlying asset but place bets on market movements. It is for this reason some CFD brokers also offer spread betting products.

Other similarities include:

1. Both involve trading with leverage (also called margin)
2. Involve speculating on the movements of the asset
3. You can profit from price movements in either direction (going long or short)
4. Can use the same type of financial instruments (though spread betting can also be applied to sports)

While CFDs and spread betting definitely have overlaps, there are notable differences. These differences are best captured in the example below:

Example:

A day trader specialising in stocks will buy and sell the actual shares or equities in FTSE 100-listed companies in order to profit from changes up or down in the share price.

• A spread bettor will place a bet with a spread betting broker that the FTSE 100 index will rise or fall within a certain number of points and profit if he or she predicts the direction correctly.
• A CFD trader technically doesn’t “trade” at all, but enters into a contract to exchange the difference in price between an asset’s current and future value. A trader who believes the price of an asset will fall will go short, while a trader who thinks it will rise will open a long position.

Other differences between spread better and CFD trading

1. CFDs can be traded directly in the market (i.e. using direct market access). Spread bets can only be done over the counter via a broker. For this reason, only CFDs can be transferred between traders
2. Spread betting is tax-free (at least in the UK) while CFDs are not. Traders won’t pay capital gains tax or stamp duty on profits from spread betting. Profits from CFD trading, however, are subject to tax meaning any losses can be offset against future profits for tax purposes.
3. Spread bets unlike CFDs are exempt from stamp duty
4. Spread betting does not have commissions (in addition to the spread) meaning there will also be a spread to pay. CFDs may be spread-only or have commission costs in addition to the spread (meaning 0 spreads are possible).
5. Spread betting (in the UK) uses GBP as the default currency, CFDs will/may require conversation from other currencies (usually USD). This means there are no conversion fees when spread betting.
6. CFDs unlike spread betting do not have a fixed expiration date (meaning they can be renewed if both parties agree to it and held indefinately). Spread betting has a fixed expiry date for when the bet is first placed.
7. CFDs are subject to swap fees (overnight funding charges), spread bets are not.
8. Finally, while financial spread betting is legal only in the UK, many countries around the world allow day trading in CFDs.

FTSE Spread Betting vs Forex Trading

In forex trading, also known as foreign exchange trading, traders buy and sell currencies on the foreign exchange market. Spread betting, on the other hand, is a type of financial betting in which traders speculate on the price movements of a financial market, such as the stock market or the foreign exchange market.

The main difference between forex trading vs spread betting, a trader actually buys and sells currencies. In spread betting, on the other hand, a trader simply speculates on the price movements of a financial market. In both cases, traders generate profits by correctly predicting the direction of the market and opening short or long positions. Only in forex trading, however, does the trader assume the risk of purchasing the underlying assets.

Forex trading also differs from spread betting when it comes to taxation and regulation. The United Kingdom considers trading forex a form of retail investment and regulates activity accordingly. HM Revenue and Customs Authority also assess capital gains taxes and stamp duty on any profits from forex trading. Spread betting profits, on the other hand, are treated as gambling winnings and not subject to tax. This can translate into higher profits in the short term but carries a higher level of risk overall.

Other differences to note include:

• Spread betting is considered a form of gambling in Sharia law, Forex trading is not making it permitted in Islam.
• Forex trading involves the trading of currency pairs, spread betting can be done with any financial instrument.

How to Start FTSE 100 Spread Betting

Whether it makes sense to engage in FTSE 100 spread betting largely turns on a trader’s available liquidity and risk tolerance. The UK treats spread betting as a form of gambling for a reason. The same volatility that produces big wins can also lead to catastrophic losses, especially when traders use leverage to amplify a position.

If you are new to spread betting, here are some tips before you start spread betting.

1. Research Trading Strategies

Before committing to a trading platform or broker, you’ll want to think about the type of trading strategy that best aligns with your risk tolerance and investment goals. Below, we outline four of the most popular approaches to spread betting:

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

Keep in mind that this is hardly an exhaustive list. You may find that a combination of strategies proves most effective, or develop your own methodology based on experience.

2. Choosing a Spread Betting Broker

You’ll want to consider a number of factors when choosing a spread betting broker, including trading costs, the choices of trading platforms, and risk management tools. While it may be tempting to focus entirely on commissions and minimum deposits, it makes good financial sense in the long term to prioritize brokers that provide the tools you’ll need to succeed in spread betting.

If you intend to make spread betting part of a larger investment strategy that includes spot trading in forex, stock indices, CFDs, or other financial products, consider opening an account with the best, regulated broker operating within your jurisdiction to maximise opportunities. Spread betting specialists, on the other hand, may opt to pay a premium for a broker with tools tailored to spread betting markets, such as IG or FxPro.

Other traders may be happy with the MetaTrader 4 or MetaTrader 5 trading platform when spread betting. While specifically designed for CFD forex trading, these platforms are the most popular trading platforms globally. Users benefit from robust technical analysis tools and indicators equally useful for traditional trading and spread betting analysis. Brokers to consider with MT4 or MT5 include Pepperstone, City Index and FXCM. You can see us compare these brokers on our best spread betting platform for UK traders page.

3. Open a Spread Betting Account

Beginners may want to test the waters with different brokerages and spread betting platforms by opening demo accounts. These risk-free accounts allow novice traders to simulate bets to get a feel for the broker’s interface, execution speeds, and educational resources. We compared the beginner spread betting brokers for these types of traders.

More experienced traders, on the other hand, may find it simpler to engage in spread betting as a supplemental activity through a preferred broker rather than opening a new trading account just for this purpose.

4. Risk Management

Risk management is an important trading skill, particularly for those who trade on margin.
Many of the same tools used by traders to protect their investments in traditional trading work equally well in spread betting.

• • 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.
  • 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.
  • Stop-loss orders. A stop-loss order automatically closes a position when the market drops below a certain point. UK forex brokers will include stop-loss orders in their suite of risk management tools. However, some off-shore brokers may not. Some brokers will also allow traders to open guaranteed stop-loss orders, which ensures that an order fills at exactly the specified price.

Frequently Asked Questions

Can I Spread Bet On The FTSE 100?

Spread betting is available from Sunday night to Friday night for UK traders. Some brokers such as IG also offer FTSE spread betting on the weekends through a separate market. Retail trader leverage can be up to 30:1 depending on the broker selected.

Is Financial Spread Betting Legal In the UK?

While spread betting is legal in several jurisdictions, it’s exceptionally popular in the United Kingdom and Ireland due to the favourable tax regime. As a result, many of the most reputable spread betting providers offer retail investor accounts exclusively to British citizens.

Can I Use The Broker Financial And Sports Spread Betting?

UK traders can use the same spread betting broker for both sport and financial spread betting but will need to open separate accounts. Only a handful of brokers offer both types of trading including Spreadex with a further details provided on the sports spread betting page.

Disclaimer

Spread betting is an inherently high-risk activity and relies on extreme market volatility to generate profits. To protect your investment, we advise trading only through a fully licensed broker regulated by the Financial Conduct Authority (FCA). While you will remain financially responsible for liabilities incurred due to losing positions, you will enjoy additional protection against fraud.

Spread betting is a highly speculative form of trading and is not suitable for all investors. You can view all the types of trading options on our compare forex broker homepage.