What is spread betting?
Financial spread betting is a tax-free way to take advantage of rising or falling markets.† Watch our video to see how spread betting works.
Transcript
What is spread betting?
Spread betting is a way to take a position on whether you think a market will go up or down.
You can spread bet on a huge range of financial markets from all around the world, including individual shares, stock indices, commodities and currencies. And unlike conventional trading, spread betting is a leveraged product, which means you only need a small initial margin to access a much larger portion of a financial market.
With each market you are presented with a 'buy' and a 'sell' price either side of the underlying market price. The difference between these two prices is the spread. If you think the market will move up, you open your spread bet at the 'buy' price, also known as going long. If you think it will go down, you open at the 'sell' price, called going short.
The more the market moves in the direction you predicted, the more profit you make. Conversely, the more the market moves in the opposite direction, the more you will lose.
How do I open a position?
You open a position by choosing a market, such as the FTSE® 100, and then deciding whether to 'buy' or 'sell'.
In this example, the FTSE® 100 price is 5149/5150. This means the 'sell' price is 5149 and the 'buy' price is 5150. You believe the value of the index will rise and 'buy' at 5150.
How is the size of my position determined?
Because financial markets are measured in points, you must decide the amount you will earn or lose for each point the market moves. In this case you specify £2 per point.
Your profit or loss is the difference between the opening and closing prices of your position, multiplied by the amount per point that you set.
Do I need a deposit?
The size of your margin varies from market to market. In this case you need 40 times your stake, which is £80. Your margin is only a small percentage of your total exposure: this is called leverage, one of the key benefits of spread betting.
It's important to understand that spread betting can lead to losses that exceed your initial deposit, though you can cap your potential losses by using a stop order. This means your position will close automatically if your stop is reached. Please note that only guaranteed stops will protect you from slippage.
How long will my position be open?
You can close your position at any time. If left open, your position will close automatically on its expiry date and at its current market level.
In this example, the price of the FTSE® 100 starts to rise. It eventually reaches 5275/5276. You believe it will continue to rise, so you keep your position open. Unfortunately, the price falls and your profit starts to decrease, so you decide to close your position and take your profit. The price is 5250/5251, so you 'sell' at 5250. The difference between the original 'buy' price and the 'sell' price is 100 points. At £2 per point, this means you earn £200 profit.
With each market you are given a 'buy' and 'sell' price either side of the underlying market price: this is known as the spread.
If you think the market will rise, you open your spread bet at the 'buy' price. If you think it will fall, you open at the 'sell' price.
You also decide the size of your position – the amount you will earn or lose for each point the market moves.
The more the market moves in your favour, the greater your profit. Conversely, the more the market moves against you, the greater your loss.
A tax-free way to deal on financial markets†
Any position you open is a bet, so your profits are free from capital gains tax.
Leveraged access to the markets
Unlike conventional trading, spread betting is a leveraged product. This means you only need a small initial margin to gain full exposure to an underlying asset's movements.
Risk management
It's important to understand that spread betting can lead to losses that exceed your initial deposit. Before you begin, learn about the potential risk and
how we can help you manage it.
Help and support
For questions about spread betting or the financial markets, visit our help and support section or get in touch with David Jones, our chief market strategist, on Twitter.
Related info
Spread bets are leveraged products. Spread betting may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.