What Is Spread Betting and How Does It Work

Spread betting is a popular derivative product that allows you to speculate on financial markets without owning the underlying asset, such as currency, indices, commodities, or stocks. Instead, you’d be betting on whether the price will climb or decline in the future.

You don’t purchase or sell the underlying instrument when you trade spread betting in the UK (for example a physical share or commodity). Instead, you place a spread bet based on whether you believe an instrument’s price will rise or fall. You would open a long position if you believe the value of a stock or commodity to rise (buy). You would take a short position if you believe the stock or commodity to fall in value (sell). If the market moves in the way you want it to, you’ll make a profit or a loss.

Traders can wager on the direction of a financial market without owning the underlying security by using spread betting. Spread betting is occasionally marketed as a tax-free, commission-free activity that allows investors to speculate in both bull and bear markets, but it is still illegal in the United States. Spread bet risks can be managed with stop loss and take profit orders, just like stock trading.

Spread Betting’s History

Spread betting was first introduced in 1974. Stuart Wheeler, a young unemployed stockbroker, had a brainwave that led to people trading gold prices. Stuart Wheeler’s concept was to construct an index that would allow investors to wager on gold’s movement without having to buy or sell the physical commodity in the market. Investors Gold Index was the name given to this new, creative company until the Bank of England objected to it trading under that name, and it was renamed IG Index. IG expanded its product offering to include foreign exchange and commodities a short time after. That, you could say, was the tip of the iceberg.

Other spread betting companies began to emerge in the 1980s, aided by the economic boom. During this time, the spread betting market continued to expand, although it was still limited to a small portion of the population. One of the issues at the time was that spread betting companies only offered prices for currencies, commodities, options, and a few large indices – markets that were unfamiliar to the general public, thus only a few expert investors were ready to bet on their direction. It’s worth remembering that the general public was accustomed to investing in stocks and bonds at the time, and spread betting was still new ground.

The Bid-Ask Spread 

The difference between a security’s ask (offer/sell) and bid (purchase/buy) price is known as the Bid-Ask Spread. The asking price is the price at which a seller is willing to sell, while the bid price is the price at which a buyer is willing to purchase. A trade occurs when the two value points in a marketplace meet, i.e. when a buyer and a seller agree on the prices being provided by each other. Demand and supply determine these prices, and the difference between these two forces determines the spread between purchase and sell prices. The higher the spread, the larger the gap! The Bid-Ask Spread can be calculated in both absolute and percentage terms.

The amount by which the asking price for a market asset exceeds the bid price is known as the bid-ask spread. The difference between the highest price a buyer is ready to pay for an item and the lowest price a seller is willing to take is known as the bid-ask spread.

The bid price is paid by those who want to sell, while the asking price is paid by those who want to purchase.

The difference between the highest price a buyer is ready to pay for an item and the lowest price a seller is willing to take is known as the bid-ask spread. The transaction cost is the spread. The market maker buys at the bid price and sells at the asking price, whereas price takers buy at the asking price and sell at the bid price. For an asset, the bid indicates demand and the ask represents supply. The bid-ask spread is widely used as a proxy for market liquidity.

Spread Betting Risk Management

Despite the dangers of using large leverage, spread betting provides useful methods for limiting losses.

• Stop-loss orders: Stop-loss orders limit risk by automatically terminating a losing trade once the market reaches a predetermined price level. When using a conventional stop-loss order, after the designated stop value is achieved, the order will close your transaction at the best available price. It’s possible that your transaction will be closed out at a lower level than the stop trigger, particularly if the market is experiencing severe volatility.

• Guaranteed stop-loss orders: This type of stop-loss order ensures that your transaction will close at the precise value you choose, regardless of market conditions. This type of downside protection, however, is not free. Your broker will usually charge you more for guaranteed stop-loss orders.

Risk can also be reduced by using arbitrage, which involves betting in two directions at the same time.

Arbitrage In Spread Betting

When the pricing of identical financial instruments diverges in different markets or across different organizations, arbitrage opportunities develop. As a result, the financial instrument can be purchased at a cheap price and sold at a high price at the same time. A risk-free return is obtained through an arbitrage transaction, which takes advantage of market inefficiencies.

Due to increasing communication and extensive access to information, arbitrage chances in spread betting and other financial instruments have been curtailed. Spread betting arbitrage can still happen if two organizations take opposing positions on the market and create their own spreads.

An arbitrageur wagers on spreads from two distinct corporations at the cost of the market maker. When the top end of one company’s spread is lower than the bottom end of another company’s spread, the arbitrageur benefits on the difference. Simply put, the trader buys at a low price from one company and sells at a high price from another. The amount of return is unaffected by whether the market rises or falls.

There are many distinct types of arbitrage, which can be used to profit from discrepancies in interest rates, currencies, bonds, and stocks, among other things. While arbitrage is often linked with risk-free profit, it does come with its own set of concerns, including execution, counterparty, and liquidity issues. The arbitrageur may suffer considerable losses if trades are not completed smoothly. Similarly, counterparty and liquidity risks might arise as a result of market volatility or a company’s failure to complete a transaction.

Final Thoughts

Spread betting has successfully lowered the obstacles to entry and developed a wide and varied alternative marketplace, as it has evolved in sophistication with the arrival of electronic marketplaces.

Arbitrage, for example, allows investors to profit from price differences between two marketplaces, such as when two firms offer different spreads on the same asset.

Overleveraged continues to be a big issue in spread betting, both in terms of temptation and danger. Spread betting, on the other hand, is an appealing possibility for speculators due to the cheap capital required, risk management techniques available, and tax benefits.

We Offer Mentorship Program

If you think you are ready to go to the next level, then this is the right program for you. The Full Mentorship Program includes close supervision and mentorship to maximize your trading skills.

 PROFESSIONAL TOOLS 

Practical tools to help you track and improve your trading capabilities.

INSTRUCTOR

A professional trader who will serve as your mentor, personal accompaniment, and a direct communication channel all the way.

TRADING COMMUNITY

Entering a quality community of traders who already know how to make successful trades in the market.

Learn More