All About Financial Spread Betting and How To Profit

Spread betting is perhaps the simplest form of derivative trading around and is certainly probably the most tax-efficient. Spread bets permit you to bet that the cost of an underlying asset (a share, commodity or index) will rise or fall. This means that you could hedge your existing holdings, maybe betting on a fall inside the FTSE 100 to offset the risk of a fall inside your UK portfolio.
You could also use spread betting to speculate on your view of an underlying asset (a share cost or index level, for instance), either attempting to profit from a falling price or hoping to make enhanced gains from a rising price. Betting on falling costs is recognized as ‘going short’, whereas betting on rising costs is known as ‘going long’.
The wonderful benefit of spread betting is that gains are totally free from tax. This means you don’t need to pay capital gains tax at 40 per cent (for higher-rate taxpayers) on gains over the annual exempt allowance, which is presently ?9,200. On the other hand, you can not offset any losses from spread betting on gains made elsewhere.
Spread betting is also really flexible and allows you to decide on risk levels to suit your own circumstances. This is because the higher the degree of gearing (magnification) you use inside the hope of boosting returns, the a lot more your profits or losses will probably be enhanced.
For instance, you could set your gearing level at 10 times (10-1), where your profit or loss would change by 10p for every single point move in the FTSE 100 index. In the event you had been much more confident (or could stand to make a larger loss), you could gear up by 1 thousand times, where each and every point move by the FTSE 100 would generate a ?10 change inside the value of your bet.
Though spread bets may be kept open for numerous months, you ought to leave a deposit (recognized as margin) with your broker. A typical minimum margin level could be around ?2,000. However, if you are making a loss on your position, you must top up the margin every single day – though you don’t have to keep the bet open for as long as you intended at the outset, naturally.
In the event you bet on a rising price, you are able to make unlimited enhanced profits. And, if the marketplace moved against you, your losses would be enhanced but capped, as the underlying price could fall no further than 0p.
On the other hand, should you bet on a falling price, your potential profits could be enhanced but limited. And in case you bet on a falling cost and it rose, your losses could possibly be unlimited – hence, the want to top up your margin (on any day you lose funds) acts as a break and could force you to close a disastrous position, as opposed to racking up enormous losses, which would only be settled at the close of the bet.
You are able to also restrict your prospective downside by setting a stop-loss together with your broker. This would close your position, if the underlying cost moved against you and past a predetermined level (falling 10 per cent below its opening cost, as an example).
Stop-losses must not be set too tight, though, as the underlying price could move against you just before changing direction, so you do not want to be closed out too early. You can also use a trailing stop-loss, which keeps the exact same percentage-point distance but follows a rising underlying price up in a bull market, enabling you to lock-in some gains.
Spread-betting providers set their own spreads, which aren’t necessarily the same as the bid price and give cost for an underlying share. So spreads may be set a lot wider for spread betters (though, in theory, competition between brokers ought to maintain spreads fairly tight).
In reality, though, underlying spreads on some shares might be as wide as 5 per cent, even though they’re usually significantly tighter for large, frequently-traded shares. This is because the wider the spread, the larger the movement needed by the underlying cost for the bet to pay off.
You go long with a spread bet by ‘buying’ the underlying asset at its supply cost and close it by ‘selling’ at the bid price. To go short, ‘sell’ the underlying asset at the bid cost and close by ‘buying’ at the provide cost.
The only distinction is in foreign-exchange trading, sometimes known as forex, which is really a form of spread betting. Currencies are often shown in pairs and you get the 1 you believe will perform far better. For example, in the event you feel the dollar will fall relative to sterling, you have to purchase sterling (versus the dollar).
To conclude spread betting is great fun, and almost anyone can appreciate the odd bet now and again. But in case you want to make funds from spread betting, then it ought to be taken seriously along with a disciplined and tactical approach is required.