Introduction to Financial Spread Betting

Financial Spread betting is a way of backing your judgment on a range of financial markets in a similar way to CFDs but classed as a bet entitling individuals to commission free and tax free trading depending on the tax jurisdiction and status.
 
 

Basics of Spread Betting

Introduction to Spread Betting

Speculating on the markets by way of betting on the direction rather than buying or selling the actual shares was originally a popular method of trading in the U.S in the early 1900’s until it was eventually outlawed. The concept was then reborn in the 1970’s as a way of speculating on the direction of the gold price, the market and range of products grew to what is now one of the most popular vehicles used in the UK for trading.

Current Marketplace

Financial Spread betting is mainly popular in the UK due to the current tax laws and is the product of choice for many traders compared to CFDs and futures trading.

Spread betting works on a spread basis i.e instead of charging the client a commission or a fee for the trade, the provider will charge a spread (please see example below) which incorporates all the costs for the trade. Clients are able to speculate on most financial markets ranging from UK and international equities to commodities futures such as wheat and oil.

Mechanics of a Spread Bet

The concept of spread betting as mentioned is very similar to CFDs and can in fact be classed as a type of CFD trade. Put in simple terms if you have a view that the FTSE100 index is going rise then clients decide how much per index point movement they wish to bet.

  • FTSE 100 index is trading at 6100
  • Spreadbetting firm is quoting a price of 6098-6102
  • You decide to buy GBP2 per point at 6102
  • FTSE moves up you decide to 6180
  • Spreadbetting firm is quoting 6178-6182
  • You decide to sell GBP2 per point at 6178
  • Profit = 2per point x 76 points = GBP6 profit tax free*

Spread bets differ from traditional CFDs in so much as they are traded over a fixed term with an expiry date, so if you have not closed your position beforehand it will expire usually at the market level at a predetermined date in the future. Many providers will allow you for a small fee (usually charged in the spread) to roll over the current bet into a new bet at expiry if you are wishing to carry on your trade.

Spread betting Providers

Providers are mainly UK based and do not operate like typical bookmakers who are reliant on you losing your bets to create their profit. As previously mentioned the bookmakers profits are derived from the spread they charge which is usually slightly wider than the current market spread.

Currently there are approx 10 leading financial bookmakers in operation. It is worth noting that different providers have different product ranges and if you open a bet with one provider you must close it with the same provider , bets are not usually transferable unlike dealing with a conventional stockbroker.

FinancialSpreadBet.com will be featuring reviews and provider information to allow an informed decision before placing your first bet.


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