Spread betting is a popular type of derivative product made available by many brokers around the world that enables you to trade in particular assets without actually purchasing the underlying asset itself.
We will examine key components of spread betting, how it works, and how you can get involved.
Basics of Spread Betting
The first question to answer here is, what exactly is spread betting? Well, spread betting is a derivative product and strategy in which you predict whether the value of an asset will rise or fall. Since it is a derivative, just like when you are trading CFDs, you do not actually own the underlying asset.
This non-ownership of the asset itself is not necessarily a bad point since it does provide you with a great deal of flexibility to profit from the price of the asset going up or down. In spread betting, this is exactly what you will be doing. You make a prediction on the price of an asset going up, or down. If your prediction is correct, then you can profit for each point an asset gains or loses. If your prediction is incorrect then you can also lose a set amount per point.
Going Long or Short in Spread Betting
As well as being able to predict and place spread bets on almost any type of asset from forex currency pairs, commodities, indices, cryptocurrencies, and more, you also have the option of going long or short with your spread bet.
Going long in spread betting means that you predict the price of the underlying asset will rise. If that does happen, then you will make a profit. This profit will be determined by how much the asset you have bet on does actually rise before you close the position.
Going short in spread betting means that you think the asset will go down in price. If this does happen, then you will be in profit by an amount that is determined by your bet size.
The Bet Size
Your bet size in spread betting is the amount which you bet per unit on the underlying asset movement. Each asset price movement is measured in points. The value of these points can differ depending on the underlying asset though in stocks a point is typically equal to $1.
So you will set a bet size per point when opening a spread bet. The minimum amount you can set will typically be determined by the broker you are spread betting with, and the asset you are opening the position on.
You may decide to place a spread bet on Apple stock when the market price is $100. If you think this price will rise, then you would “Buy” at $100. For this example, let’s imagine your bet size per unit is $3. If the stock price then does rise to $120 and you close the position, you will have made a $60 profit. This is $3 per each point the asset has risen. If the asset price closed at $95 however, you will have lost $15 on the bet.
As mentioned above, spread betting is flexible in that you can also bet on the price of an asset to drop.
Using the same example. If you feel the price is going to drop, you would place a spread bet to “Sell” the asset. If it does then drop to $95 as above, you will have made a $15 profit. In this case though, if the asset price rises above $100, you will lose $3 for every point and vice versa.
How Long Does a Spread Bet Stay Open?
While there are a variety of different types of spread bet you can choose in terms of expiration, these are a couple of the most popular:
Daily Spread Bets: These are a popular choice for short term spread betting. A daily spread bet will expire at the end of the day which you open it, or you can also close it prior to this time with most brokers. Don’t confuse this with a rolling daily spread bet though. A rolling daily spread bet will continue to remain open until you close it and incur things such as overnight fees along the way.
Futures Spread Bets: This type of spread bet can be perfect for longer-term traders. These are based on an assets value within the futures market. These can have a delivery date several months in the future. The expiration date here will be that of the futures contract, though they can be closed earlier. A futures spread bet also does not accumulate any overnight holding fees.
Leverage and Margin in Spread Betting
Just like in other types of trading in derivative markets in particular, leverage provided by your broker can greatly increase your purchasing power. Depending on the broker you may find a leverage of 5:1 or more available. A 5:1 leverage means that for a $1,000 deposit, you could place spread bets up to the value of $5,000.
Using leverage in trading does though does mean that the margin comes in to play. The margin is how much of your own money you need to hold in the account as a deposit to keep your positions open. If your positions are losing it is possible you may receive a margin call to deposit more funds to your account.
Spread Betting Brokers
These brokers currently offer spread betting to investors from jurisdictions where it is legal & fully regulated such as the UK & Ireland.
AVA Trade – Offers its traders leveraged spread betting on more than 200 financial instruments, including more than 65 forex currency pairs, metals, energies & agricultural commodities, major indices and bonds from across the world, and a large variety of equities and ETFs. With such a large variety, you are sure to find the instruments that suit you.
Warning: Trading Forex/CFD & Options on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade any such leveraged products you should carefully consider your investment objectives, level of experience, and risk appetite.
CityIndex – Offers a choice of over 4000 spread bet markets, including:
- Indices such as the UK 100, Wall St , Germany 30
- FX such as GBP/USD, GBP/EUR and JPY/USD currency pairs
- Shares such as Rio Tinto, Amazon and General Electric
- Commodities such as oil, gold and cocoa
- Other markets Including bonds, interest rates and options
Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Capital at risk.
Spread betting is certainly one of the most exciting derivative products available to you as a trader. It is extremely flexible and can be applied in almost any market made available by your broker and across a range of time frames.
That said, spread betting does come with a certain level of risk attached, particularly if you are trading on leverage. To that end, it is always important to perform due diligence and set stop losses to maintain a strong level of risk management while trading.