Want to know what Spread Betting is, how it works, its advantages & disadvantages and how to use it to trade the markets? Then, take 5 minutes to read this guide.
Spread Betting is a trading product used to speculate on the financial markets, including individual equities, stock indexes such as the FTSE 100 or Nasdaq, bonds, currencies and commodities. It is also extremely flexible, enabling traders to profit from both up and down markets via short selling.
What differentiates spread betting from other types of financial products is that the profits are 100% Tax-Free.
How Does Spread Betting Work?
A spread bet broker will quote a two-way price and the customer will bet the market is going either up or down with an associated cost per point. For example –
A winning trade spread bet trade
- The FTSE 100 market might be quoted at 4200 – 4202
- You have the option of buying at 4202 (the offer price) or selling at 4200 (the bid price)
- If you expect higher prices, buy at 4202 perhaps risking £1 a point
- Assume you’re right; the market rallies, and you sell out at 4222
- 4222 – 4202 = 20 x £1 a point = Profit of £20
A losing trade
- The FTSE 100 market is quoted at 4289 – 4291
- You’re expecting prices to rise, so buy at 4291, risking £1 a point
- However, the market declines, and you sell out at 4261
- 4291 – 4261 = -30 x £1 a point = Loss of £30
A Short trade example
As indicated, spread bets can be used to easily short the market, or profit from falling prices.
- The Gold market is $995 – $996
- You expect prices to fall and so sell short £1 a point at $995
- Gold falls, and to take your profit, you buy the short trade back at $961
- 995 – 961 = 34 x £1 a point = Profit of £34
Note that although Gold is quoted in dollars, the trade was done in pounds which means there’s no currency risk and no need for a fiddly currency conversion. We have a page where more spread betting examples are offered.
Useful Note About Spread Betting
Before you spread bet, here are some useful tips to get you started
1. Spread Bet profits are open-ended, and so are losses
If you place a £10 bet at 10-1 with a High Street bookie, you obviously know in advance the maximum potential profit (£100) and loss (£10).
But with spread betting, both the profit and loss are open-ended, and this is important to understand especially when it comes to potential losses. For example, buy £1 of the FTSE at 4200, and if the trade is held for a long time, it’s possible for the market to drop 500 points, maybe even 1,000, translating into a £500 – £1000 loss.
Of course, any trader is unlikely to run such a loss so this example was used to highlight the potential of open-ended losses.
So, how to control the risk when spread betting? Use a stop loss as discussed below.
2. Losses can be controlled via stop losses
A stop-loss order is self-explanatory; it stops losses. For example –
- Buy the FTSE at 4200, risking £1 a point
- Place a stop loss order at 4180
- If the market moves below 4180, the position will be automatically sold for a loss
Note that a stop loss order is only activated should the price move through a certain point, 4180 in this example. Therefore if the market were to trade down to 4181 before rebounding to 4200+ the stop order would not be executed.
Ultimately spread bet stop losses are a good way to pre-define a loss when a trade is first initiated.
3. Most orders can be entered ahead of time
As indicated, spread betting is very flexible, meaning there are a myriad of different orders a client can use to fine-tune his trading, such as –
- A market order – buys or sells the current price
- A limit order – Sells above the market or buys below – for example, if the FTSE is trading at 4200, you can enter a limit sell order at 4225, and if the market moves higher and through the order level, it will get automatically executed
- A market on close order – trades right on the close
- More information on the different orders on this link
TIP – Get a thorough knowledge of the different order types
Unlike buying or selling stocks through a traditional stockbroker, there are countless different order types and techniques with spread bets, and these can seem complicated when first starting out.
It’s, therefore, imperative to make sure you know what they all are, how to use them, and their advantages and disadvantages in different trading scenarios.
4. How much can you bet per point
In this guide, I have used £1 a point in all the examples. £1 is usually the minimum trade amount, but the maximum can be much larger, perhaps £1,000 or even £3,000 a point.
And this is what makes spread betting so interesting because you can make it as low risk (£1 a point) or as high risk as you or your account balance warrants.
5. Trading Months To Spread Bet can make a difference
If you study spread betting in more detail, you’ll often see there are a few different market quotes for the same product. For example, a broker might offer the following markets on the FTSE 100 –
- Daily market – for day trading
- Weekly market – for positions of up to a week
- Monthly market – for positions up to a month
- Quarterly market – for positions of up to 2-3 months
- Yearly market – for multi-month positions
Which market to use for a particular trading idea can seem complex at first, but it highlights the importance of properly researching the mechanics of spread betting before risking real money.
Try, therefore, to be different to many new clients who jump in at the deep end without sufficient knowledge, as then it’s odds-on that you’ll generate losses.
6. Dealing is the same for all markets
With spread bets, it doesn’t matter which market you’re trading, the buying, selling, profit and loss process is exactly the same. So trade Orange Juice, Glaxo shares, Gold or the FTSE 100, and your broker will –
- Quote you a 2-way dealing price to go long or short, and
- You have the choice of buying or selling with an associated pound per point
7. Commissions and other costs
No spread bet broker charges a commission or any other costs, such as Stamp Duty. However, the bid-offer spread (the difference between buying and selling) is theoretically a cost and must be noted.
Tight bid-offer spreads mean cheaper dealing costs, so be on the lookout for them. Also, realise that the more trading you do, the more you’ll pay away the bid-offer spread, and this can start to get expensive. Check out our listed best beginners spread betting platform and other brokers worth noting.
Spread Betting Advantages
Spread betting is a dynamic trading method which is why many UK residents choose this over CFDs. From tax-free gains to flexible market access, the eight points goes over the key benefits,
- Tax-free profits – Who can argue with this point
- No commissions or Stamp Duty – This is obviously good news, but Spread Bet trading is not free, as you’ll have to pay the bid-offer spread
- Trade with smaller amounts of money – The ability to trade with small positions is a massive advantage when learning the game, as losses can be kept to a minimum
- Instant access to all the markets – Spread Betting offers an incredibly wide range of different markets, which can all be traded from one account
- The ability to easily go short – Flexible products are always the best
- Good Internet software – Collectively, the spread betting firms have invested millions of pounds into software development, and it shows their online trading platforms are superb
- Unique markets – Spread betting offers markets on property and Binary Bets, which are similar to fixed odds bets – more information on Binary Bets
- Ability to place stop losses – Helps reduce risk, and as potential spread betting losses are theoretically using a stop loss, this is a sensible and prudent way to approach the game of speculation. See Secret 5 – Always use a Stop Loss – One day, they’ll save your (financial) life – which is one of our 10 Secrets to Successful Spread Betting.
I created a more detailed article which you can access on the advantages of spread betting section.
Spread Betting Disadvantages
While spread betting can be an enticing trading strategy, it’s essential to be aware of the pitfalls that come with it. Here’s a breakdown of the challenges you might face when diving into this form of trading:
- Leverage – Leverage is like fire, your best friend but it can turn out to be a nasty enemy. Taking on too much leverage and even small market moves can result in heavy losses
- Tax-free – it’s only an advantage when you win. When you lose losses can’t be offset against Capital Gains Tax
- Wide bid-offer spreads – The spread is where the spread bet brokers make their money. The bid-offer prices quoted are often wider than if trading the cash product. For example, British Land might be quoted at 460.5 – 461 on the London Stock Exchange but the spread bet market is 460.1 – 461.5. To the initiated that might not seem too much, but it is a big deal especially if short-term trading
- Credit offered – Depending on who you are and if you’ve got a good credit rating the spread betters can offer credit accounts. To some, this might be an advantage but to others, it will only cause problems. My advice is simple – deposit cash with a broker and forget about credit
Which Spread Betting Broker To Use
There are good spread bet brokers and there are bad ones. Having a good broker won’t guarantee you profits but a bad broker will probably lead to losses as a combination of their gamesmanship and suspect software takes its financial toll.
The FCA regulated spread betting so make sure the UK broker has regulation. Our main spread betting UK platforms compare the FCA regulated broker based on fees, trading platforms and the trading experience they offer.
Spread betting is a great trading tool for those wanting to speculate on the financial markets as –
- It’s flexible
- Relatively inexpensive to trade
- A single account can be used to trade a myriad of different instruments
- The online trading platforms are excellent, and
- The profits are tax-free
But its major downside is the leverage offered. Leverage itself is not so much of a problem if you control it, but let it get out of hand, and it’s very easy to lose a large sum in a short period of time.
For the new trader, the best advice I can give is to make sure you fully understand what you’re doing before you get heavily involved. Spread betting is not particularly sophisticated, but there are enough subtitles and nuances to fox the beginner spread bettors. Experience is therefore of critical importance.
Spread Betting Tutorials Overview
In this guide, we give a quick tutorial on what spread betting with binaries
Binary Betting: What is it – How does it work
Binary Betting was developed by the Spread betting firms and is another way of speculating on the markets, and like spread betting the profits are also tax-free.
WARNING! – Only deal with this Binary Bet Broker
- There are only a few spread bet brokers that also offer Binary Bets
- Take care who you do business with because the broker needs the proper systems to be able to quote and manage the Binary prices effectively
- Because of this, there’s only one broker to consider, and that’s IG Index
- IG is by far the biggest and best in the Binary Betting market – In fact, they developed it
- Use other brokers at your own financial peril
- For a Binary UP bet, you’ll be offered a price on a market such as the FTSE 100 or Gold on whether it will close up on the day
- The binary bet be quoted anywhere between 1 and 99, perhaps 59-61
- Taking the FTSE as an example – if the index does indeed close higher on the day (by 1 or 101 points, it doesn’t matter; up is up), the binary bet will settle at 100 (at the close of business)
- But if the FTSE closes down on the day (again by 1 or 101 points), the binary bet will settle at 0
What is important to note is that binary bets work in a similar fashion to fixed odds bets offered by a high street bookie, ie your maximum profit and loss are always known beforehand. This is because the binary market cannot rise above 100 or fall below 0.
How Binary Betting Works
A winning binary trade
- Assume the market for the FTSE closing UP today is quoted at 47-49
- You buy at 49 points, risking £1 a point
- The FTSE closes higher by 9 points that day, and the binary bet is closed at 100
- Your profit = 51 x £1 = £51 (100 points – 49 points)
A losing binary trade
- Assume the market for the FTSE closing UP today 61-63
- You buy at 63 points, risking £1 a point
- The FTSE is looking good into the close, it’s 10 points higher with 5 minutes to go, but some big sell orders push the market down in the final few minutes, and the index closes 1.5 points lower
- The binary bet will close at zero, meaning a loss of 63 points
- 63 points x £1 = £63 loss
Binary bets can also be shorted
- Unsure what short selling is – see this LearnMoney.co.uk guide
Binary bets can also be shorted so you can back against an event happening. For example –
- The FTSE binary bet for the market closing UP is quoted at 31-33
- You think the market will close lower and therefore sell short at 31, risking £1 a point
- If the FTSE closes higher, the binary bet will settle at 100; if it closes lower, the binary bet will settle at zero
- Your market forecast was good, and the FTSE closed 12 points lower
- Profit is 31 – zero = 31 points x £1 = £31
Binary Bets are always being quoted
Spread betting, binary betting, etc is as much about flexibility as anything. And so binary bets are always being quoted right up to when the market closes. This means you can take partial profits, or losses or even dump your position before the bet expires. For example –
- The binary bet for the FTSE closing UP is quoted at 61-63
- You buy £2 a point at 63 and the FTSE is looking good moving steadily higher over the next few hours
- You sell half of your position (£1) at 83 points (£20 profit)
- But some bearish economic news is released which pushes the FTSE sharply lower
- You sell out the other £1 of your position at 42 (loss of £21)
- The FTSE closes down 34 points and the binary bet settles at zero
The Different Styles of Binary Bets
The main Binary Bets are –
- Daily up bet – if the market closes up the bet settles at 100, if down it settles as zero
- Daily down bet – – if the market closes lower the bet settles at 100, if it closes higher it settles at zero
- Hourly up bet – If the market that hour, from say 10am-11am, closes up the bet settles at 100, zero if the market closes down in the time period
- Hourly down bet – if the market that hour, say 3pm-4pm, closes down the bet settles at 100, if up the bet settles at 0
And of course in the above examples, and indeed all Binary Bets, the markets are always being quoted so profits and losses can be taken at any time, ie the position doesn’t have to be taken in the expiry where the maximum profit or loss will always occur.
Special Binary Bets
As well as the traditional binary bets listed above there are other bets which are called ‘Specials’. These work in the same way – you bet on an event happening, if it does the bet settles at 100, if not it settles at zero.
- One touch – Will the market move through a certain level at any time during the bet’s time period
- Tunnel – The market has to stay within a certain hi-lo range for the duration of the bet
- Hi-Lo – Will today’s high or low be a given distance from yesterday’s close
- Ladders – Will a market be above a certain price at a certain time of the day
- Extreme short-term bets – 5 and 20-minute binary bets on the FTSE and Wall Street – incredibly volatile as you can imagine
Available markets to trade
Binary bet markets are offered on most of the big contracts, such as the stock indexes, the larger and more volatile shares, foreign exchange and some commodities.
However, the range of markets offered does depend on which broker is used. Some only offer a limited range of Binaries.
Interesting Binary Betting Points
They’re similar to fixed odd bets
Sharp readers will have noted that binary bets are fixed odd bets in disguise. For example –
- If you buy a binary bet at 50, risking £1 a point, your maximum profit and loss are both £50
- If you place a £50 bet at even odds via Ladbrokes, your maximum profit and loss is also £50
- If you buy a binary bet at 20, risking £1 a point, your maximum loss is £20 with a maximum profit of £80
- If you place a £20 bet at 4-1 at Ladbrokes, your maximum loss is also £20 with a maximum profit of £80
1 point higher/lower is no different from 1001 points
If you go down to the bookie and bet on a horse which, in turn, wins by a huge margin of 2 furlongs (400 meters) you won’t get paid any more money. So the winning margin is of no importance, only that the horse won.
And it’s similar to binary betting. You are betting on an event happening or not happening, the FTSE closing UP, for example. So if it closes 1 point or 1001 points higher, the winning bet still pays the same, and the losing bet will still lose the same.
This is in contrast to traditional spread betting, where both profits and losses are theoretically open-ended. So when you’re long or short, you want the market to move as much in your favour as possible.
Binary prices can be very volatile
Binary bets are extremely sensitive to the price of the underlying and, therefore, can move very quickly, especially when the markets are volatile. New traders are advised to watch how and why the binary markets move and trade for several days before risking any capital.
Also, because Binaries can move quickly, all orders have to be entered via the online trading platform and are not accepted via the telephone.
No commissions and no margin
There’s no commission for dealing in Binary bets as the spread betting firm makes their money off the bid-offer spread. Also, no margin is charged as the bet has a fixed risk, but you will need to have sufficient money in your account to trade.
If you understand how to bet via a bookie you’ll understand Binary Betting. The only differences are the way they’re quoted and the fact the markets are quoted right up to their official closes.
But are Binary bets any good, will they suit your trading?
Some love them, others think of them as slightly gimmicky. My own personal view is simple – any tool or product that adds flexibility to the financial markets is welcome. You might not want to use them today, this month or even this year but they’re just another tool for your financial toolbox, one which might come in useful in the future. It’s therefore unwise to dismiss them.
Finally, although Binary Bets are a welcome addition to the spread bet arena if there’s one problem with them it’s their often expensive bid-offer spreads of around 5%.
Prospective traders should take note of this point as the cost of doing business is far more important when trying to generate profits in the markets than many people believe, especially those new to spread betting.