Spread betting is a speculative investment form that shares many similarities with CFD trading. A spread bet is a leveraged derivative that you use to bet on an underlying security’s price movements without buying the actual security.
Lately, the interest in spread betting has increased, but we have noticed that there is still a lot of confusion surrounding the subject. To dispel the confusion, we thought we’d offer you a basic rundown of what spread betting is and how you can partake in it.
Further down on this page we’ll also compare spread betting with CFD trading and provide you with a list of the best spread betting brokers.
What Is the Spread?
To understand how spread betting works you first need to understand what the spread is.
The spread is the difference between the sell and buy price that a broker offers. You see, every broker provides two prices for each listed asset. One price is the price you would pay to buy an asset (called ask price) and the other price is what you get if you sold that asset (called bid price).
For example, the Amazon stock can be listed as 1,843 (ask/buy) and 1,839 (bid/sell), and the difference between those two prices is called the spread. Note that the broker sets these prices themselves and that they rarely match the market price.
How Does Spread Betting Work?
In spread betting, your goal is to predict whether the price of an underlying asset will increase or decrease and then bet your money on that prediction. Your profit is then determined based on how much the said asset’s spread has changed.
Let us use the Amazon stock prices listed above as an example again.
You predict that the price of Amazon shares will increase and you invest $10 in Amazon’s ask price at 1,843. If the price increases to 1,850 you make $10 for each point the spread moves, or a total of $70 (1850 – 1843 = 7*10 = 70). However, if the price would decrease to 1,830 you would lose $10 per point or a total of $130.
The same goes if you think the price will decrease, although then you invest in the bid price and make a profit if the price decreases and lose money if the price increases.
Pretty simple, right?
The Benefits of Spread Betting
There are many benefits of spread betting and some of the most attractive are:
Leverage and Increased Profits
Spread bets are always leveraged which means your potential profits are really high. Often times, the requirements are as low as 5% of the margin which means you could make a lot of money in a short period of time with a very small initial investment. Just be careful since your potential losses also increase.
Available on all Markets
Another great benefit of spread betting is that it’s available on pretty much any tradeable asset. For example, you can buy spread bets on currency pairs, stocks, ETFs, cryptocurrencies, and much more.
For many, taxes, or the lack thereof, is the most important benefit of spread betting. In certain jurisdictions, including all of the United Kingdom, spread betting is not subject to stamp duty or capital gain tax since it’s considered betting and not investing.
Not only is spread betting tax-free in many countries, but it is also commission-free. Instead of charging commission, brokers profit from the spread.
Go Long or Short
Like all speculative investments, spread betting is easy to use for both decreasing and increasing prices. Bet on the bid for decreasing prices and the ask for increasing prices.
The Risks of Spread Betting
All forms of investments are associated with a certain level of risk, and it’s something every trader has to come to terms with. However, leveraged trading including spread betting and CFDs, are associated with increased risk. Because of this, you need to trade carefully and be fully aware of the risks before you start investing. Also, never trade money that you can’t afford to lose, and when you can you should use protection against negative balances to avoid any severe losses.
There is also another downside to spread betting that few speak of. Since brokers are the ones setting the bid and ask price, they will always make sure that they have the advantage. By setting the ask price above the market price and the bid price below the market price, the broker can guarantee that they make a profit which in the end could hurt your own position.
5 Spread betting tips
- Always set up a free demo account if you are just getting started. This will let you try out the platform.
- Implement a strategy, just picking stuff at random is very likely going to cost you money. Unless you get lucky.
- Only spread bet with regulated brokers, there are too many scams out there.
- Never invest more money than what you can afford to lose.
- Make use of the analtical tools offered by the brokers, and other tools such as stop loss.
Spread Betting vs CFD Trading
At first glance, spread betting and CFD trading can look almost identical. However, even though the two investment types are very similar there are a few very important differences that you should know about.
For example, in many places, spread betting is considered betting and not a form of investment which means you don’t have to pay capital gain taxes. This is obviously beneficial since you get to keep more of your profits. CFD trading, on the other hand, is considered an investment and you have to pay taxes on your profits no matter where you live.
Moreover, spread betting is always commission-free, and you never have to pay any transaction costs while CFD trading often comes with a commission and many other fees.
Another major difference between spread betting and CFD trading is that spread betting is time-limited whereas a CFD position can be kept open for as long as the trader wants it to be. Also, spread betting is handled over the counter (OTC) while CFD trading can be done directly in the market.
As you can see, there are several differences between CFD trading and spread betting, and they both have their unique set of advantages and disadvantages. Perhaps spread betting could be compared with Binary Options, then again, they are seperate things.
Best Spread Betting Brokers
Since you made it to this page, we will assume that you are interested in spread betting so we thought we would offer some insight into the best spread betting brokers on the market.
In most cases, spread betting is offered by CFD and forex brokers, and there are only a few services that we know of that only offer spread betting. Out of those few services, no one is really trustworthy enough to use. Therefore, we encourage you to do your spread betting with one of the following regulated CFD brokers.
- IG Markets Spread Betting
IG Markets could very well be the most respected and established brand in the forex and CFD industry. The broker is fully regulated and based in England, and they offer forex and CFD trading to millions of customers all over the world. They also happen to be the biggest spread betting broker in the United Kingdom. According to their own statistics, 41% of all spread betting done in the UK is done on the IG Markets platform. Check out our comprehensive IG Markets review to learn more about this incredible broker and their spread betting product.
- CMC Markets Spread Betting
CMC Markets is another industry leading CFD and forex broker based in England. Even though CMC Markets isn’t nearly as popular as IG Markets, they have a great influence on the industry and they also represent a large part of the daily spread betting in Europe. CMC Markets offers over 10,000 assets and has a state of the art trading platform that makes spread betting easier than ever. We have written a detailed review of CMC Markets and suggest you check it out.
- ETX Capital Spread Betting
ETX Capital is the oldest CFD and forex broker in the business, and they have one of the best spread betting products we’ve come across. With an ETX Capital account, you can spread bet over 5,000 underlying assets and make use of intuitive charting tools and analytic data. In our ETX Capital review, you can read more about this broker and why we consider them one of the best in the industry.
CFD Trading Instead of Spread Betting
Do you feel like spread betting isn’t for you? Then you’re not alone. Many traders, including some of the guys here at the office, prefer CFD trading over spread betting. We can also help you find the best CFD brokers for your needs. Below you will find a list of our favorite brokers and direct links to our reviews.
- eToro review – Social copy trading at its finest
- IQ Option review – The leading broker for cryptocurrencies
- Plus500 review – A well-established broker with an award-winning platform
- Libertex review – Cutting-edge tools and over 2 million active customers
- 24Option review – Commission-free CFD and forex trading
- Markets.com review – Awesome platform, unlimited demo account, and assets for every type of trader