Spread Betting – How Does it Work?

Thanks to the increasing accessibility through the internet and the growing number of brokers with little or zero trading volume requirements, spread betting has become extremely popular in the UK. Along with great rewards, spread betting at sites such as Capital Spreads also brings in some risks for the trader. To minimise the risks, every spread bettor should understand how spread betting works, how the market functions and the strategies that should be used for effective trading.

Betting on the spread

‘Spread’ in spread betting refers to the difference between the price at which you can buy the instrument and the price at which you can sell it. A spread is represented with lower and higher price points, which are usually set by the spread betting company you have the account with.

When you spread bet, you are placing a bet by speculating the movement of the market. For instance, if you are spread betting in the currency or the forex market, then you bet on the speculation that a particular currency will rise or fall beyond the price points.

To profit from spread betting, traders bid (buy) when they think that the market is going to move above the higher price point, and offer (sell) if they think that the market is going to move below the lower price point. If the market moves a certain number of points in the expected direction, then the trader earns an amount equivalent to the number of points moved multiplied by his stake per point.

Spread betting is different from stock trading

In stock trading, you would be purchasing shares if you know that the price is going to rise, and would sell them if you think the price would fall. Also, shareholders of a company are entitled to a share in the profit, or loss, depending on the company’s performance. But in spread betting, you would not be purchasing shares or futures.

Instead, you would be speculating on the movement of the stock market, or any other market you choose, and try to make a profit. Although spread betting is not exactly gambling, what you earn from it is exempted from the Capital Gains Tax and the Income Tax in the UK.

The good thing about spread betting is that the knowledge of the right strategies and being aware of the current market conditions can help you predict the market movements efficiently.