Spread betting allows a bettor to bet on whether the price quoted for a given instrument (e.g. a share, oil, a bond, a currency) is likely to go up or down in value. The degree to which the bettor is correct or incorrect dictates the total winnings or losses: the more a price moves in the bettor’s favour, the more money the bettor makes; conversely the more the price moves against the bettor, the more money the bettor loses.
For example, imagine an share price trading at 150/151. You think that this price will rise in the two weeks and so buy the share at 151. Your bet is £10 pounds per point i.e. for every point the price rises above 151 you will win £10; for every point the price falls below 151 you will loose £10. Whether you profit or not depends on the next two weeks. If after two weeks, the new price of the share is 200/201, you can close your position and sell at 200. This is a 49-point gain, meaning you’ve made £490, tax free. If, however, the share price falls down to 151, you’d be at a 51-point loss. Closing your position would mean a £510 loss.
The spread itself refers to the difference that exists between an asset’s buy and sell price, which are quoted when you initially make your move.
Spread betting was developed to provide a tax-free, alternative to standard investing, where investors could profit from a rising asset price without actually buying the physical asset. At first, spread betting focused solely on gold and then later on currencies, commodities and indices as the market expanded.
Although spread betting winnings are tax free, bear in mind you can’t offset any losses incurred when spread betting against any capital gains you may have made elsewhere. Also
the tax advantages are of no benefit if you don’t make any profit, or your profit is less than the Capital Gains Tax (CGT) threshold.
Until the mid-1990s, however, a lack of technology available hampered both spread bettors and spread betting companies alike. Spread bettors were unable to access up-to-date market news and spread betting companies were unable to offer real-time spreads for their range of markets.
Consequently, when the mid-1990s signified the start of the technology boom, financial spread betting took a huge step forward. Spread betting companies, such as IG, invested heavily in their trading platforms. which offer sophisticated risk and account management tools, charting, analysis and news as part of their service.
In 2009, City Index launched a live trading app for the iPhone, meaning that spread bettors could finally trade on the move. In 2015, IG was one of the first spread betting firms to launch a mobile trading app for the Apple Watch.
Although spread betting firms typically provide demo accounts so that inexperienced bettors can learn the ropes without risking their money, these accounts can only simulate the real thing – the markets react to real bets, this is not the case with bets placed by using a demo account. An alternative approach is to use a beginner’s account at Finspreads, which initially lets you place bets at 10p a point. A core aspect of trading is to learn from your mistakes. The beginner’s account lets you place bets with small amounts of money and so mistakes don’t cost you that much.