What is spread betting? Spread betting is a financial product that allows you to speculate on whether the price of an asset or instrument will rise or fall. It has several similarities with CFDs. However, there are a few key differences, and some advantages and disadvantages.
What is spread betting?
First of all, spread betting is a leveraged financial product. Leverage allows you to take significantly larger positions than your capital on its own would allow. Thus, the bigger the position, the greater the profit. However, leverage magnifies losses as well as gains. It is pretty much the definition of a double-edged sword.
The main distinction between spread betting and CFDs is the rubric of what you are actually doing.
- With a CFD, when you open a position in the market, you enter into one or more contracts with the broker. When the position is closed, the broker will either give you or receive from you the difference in the price of the asset at the time the market position was opened, versus the time it was closed. Exactly as CFD stands for, it is a contract for the difference in price.
- However, with spread betting, the investor wagers a monetary amount for each incremental change in the value of an asset. So for example, an investor may bet £5 for every point that the FTSE100 rises. If it rises 50 points, the investor makes £250. But if it falls 50 points, then he or she loses that amount.
In its simplest form, it is effectively a form of gambling, except that the outcome exists on a spectrum of possible outcomes, i.e., the extent to which the price will change. It isn’t a simple “yes or no”, “win or lose” result. Obviously, the more the price changes, the more you stand to win or lose, depending of course on how far it goes for or against you. Another key difference is that you yourself decide when to exit the position. Unlike a traditional bet placed on e.g. a sports’ match, the outcome isn’t necessarily final until you say it is.
Where does the name come from?
The name comes from the term “spread”. This refers to the price difference between the cost of buying an asset/instrument (the “bid” price”), and the cost of selling it (the “ask” price). When you place a spread bet, you are effectively wagering that the price will move outside the spread in your favor. Spreads are a key source of income for forex brokers and spread betting providers, as the cost of your bet or trade is integrated into bid and ask prices.
For more information on spreads, check out the article: What is spread in forex trading? What is bid and ask?
Spread betting advantages
The main advantages of spread betting are tax benefits. In the UK, the profits are exempt from capital gains tax and stamp duty. CFD profits are also exempt from stamp duty, but not from capital gains tax. However, with CFD profits, this does mean that you should be able to offset losses against future profits for tax purposes, which you cannot do with spread betting profits. Note that spread betting is illegal in the United States.