Spread Betting Brokers

Spread betting is a derivative product that traders use to speculate on financial markets. It is a high-risk/high-reward form of online investing. This beginners guide will provide a spread betting 101 and talk through everything you need to know about the best brokers and platforms, trading strategies, plus risk management tools.

Spread Betting Basics

Spread betting is a simple product that allows investors to make predictions on the future price of popular financial markets, such as stocks, precious metals or forex. It is similar to CFDs or binary options in that traders never owns the underlying asset, for example, Tesla shares.

Importantly, two prices (buy and sell) are usually quoted, just like forex and stock market trading. The difference between the bid price (the price you can buy at) and the ask price (the price you can sell at) is the spread. Investors bet whether the price of the underlying asset will be higher than the ask or lower than the bid.

Many online reviews in the UK, US, and other countries describe spread betting as a form of gambling; however, this is not entirely true. While spread betting is tax-free like gambling, it is still subject to tight regulation like other forms of trading.

History of Spread Betting

The origins can be traced back to two notable individuals: Charles K. McNeil and Stuart Wheeler. McNeil was a mathematics teacher from Chicago who is widely credited with developing the spread betting concept in the 1940s.

But spread betting did not become an activity for financial traders until 30 years later when Stuart Wheeler figured out how to legally bypass restrictions in the UK. In 1974, the gold market was difficult to participate in for many traders due to UK restrictions on trading physical gold even though there was large demand to speculate on its price. Wheeler got around this by allowing traders to bet on the performance of gold prices rather than trading gold itself.

Since then, spread betting has boomed with many companies and brokers opening around the globe. Personal computers of the 1990s presented the wider public with the opportunity to spread trade, as well as the bursting of the tech bubble and the 2008 financial crisis. The ability to “short” markets brought many new customers who wanted to take advantage of sharp market moves and high volatility. Today, spread betting remains a popular product with many online traders.

Markets

Traders can conduct spread betting on almost any asset, including

• Cryptocurrencies (Bitcoin, Ripple, Ethereum etc.)
• Equities (Nasdaq stocks, penny stocks etc.)
• Indices (Dow Jones, FTSE, Dax, Vix etc.)
• Commodities (gold, silver etc.)
• Forex currency pairs
• Futures
• Options
• ETFs

How Spread Betting Brokers Work

Spread betting products track the value of an asset, allowing traders to take a position on the price without owning silver, for example. There are three main features of a spread bet: the spread, the bet size, and the duration.

The spread is the difference between the buy (bid) and sell (ask) price. The costs of each trade are factored into these prices, and the buy price will always be slightly higher than the sell price. For example, if the FTSE 100 is trading at 7,595.5, it could have a buy price of 7,596 and a sell price of 7,595 at brokers.

The bet size is the amount you want to bet per unit of movement. This determines your profits or losses when spread betting. For example, you could open a $2 per point spread bet on the Dow Jones. If it moves 30 points in your favor, your profit is $60 ($2 x 30). If it moved 30 points against you, you would make a loss of $60. Increasing the bet size increases potential winnings, but it also increases the risks of the investment.

The duration represents the length of time before your spread betting position expires. If you’re swing trading, the expiry date can range from days to weeks. Some brokers allow customers to close spread bets at any point before the expiration time.

How to Choose Spread Betting Brokers

It can be hard to know where to start when choosing a spread betting broker. With that in mind, we have compiled a list of key considerations:

• Minimum deposit: Check the minimum deposit offered at each broker. Choose providers that requires a low deposit that you’re comfortable with.
• Fees and spreads: What fees do brokers charge? Check holding costs and any deposit and withdrawal fees. Also, try to find brokers offering the lowest spreads.
• Demo account: Spread betting can be confusing at first. With that in mind, try to find a brokerage that offers a demo account. A practice account will let you get used to spread betting before risking real capital. Demo accounts are available at many brokers in the UK and around the world.
• Platform: Investigate which trading platforms each broker uses. Can you trade on MT4? Make sure firms offer a platform that you are comfortable with. Reviews are a good place to learn about each platform.
• Bonus offers: Compare any deals and promotions offered at each broker, like a no deposit bonus or a welcome bonus. These will give a boost to your funds when you start trading.
• Mobile app: If you want to trade while on the move, check whether each broker offers a mobile app. Also, read reviews of the mobile apps on the relevant app store.
• Customer service: Good customer service will ensure any issues are solved promptly. Check the customer support available at each broker and review contact methods.
• History and reviews: Try to find a broker that has been operating for at least three years. Also, read reviews of brokers on swingtrading.com to learn more.

Spread Betting vs. Stock Broking

When stock trading, you purchase shares in a company and the primary way to turn a profit is if the price increases. With spread betting, you can enter positions based on price movement in either direction—so you can bet on the value of a stock dropping. Plus, you don’t own the underlying asset.

A good way to explain the differences between share dealing and spread betting is through an example. Let’s start with a standard stock market trade. An investor purchases 100 Apple shares at $169. The live share price rises to $173, and the position is closed, giving a gross profit of $400 having made $4 per share. If this trade was conducted without leverage, the exposure would be $16,900. Also, commission would usually be charged to enter and exit the trade, and the returns could be subject to income tax in the UK, Ireland, the US, or other countries.

The trader could instead turn to spread betting, where the investor commits to an amount per point that they would like to bet. Let’s assume one point equals one cent of movement. The investor places an up bet (for the value to rise) at $1 per point. If the price of Apple shares rises to $173 as before, the bet has captured 400 points, and the trader receives a payout of $400.

While the profit is the same in both systems, spread betting has a few distinct advantages. Firstly, it is usually commission-free. Profits also tend to be treated the same as gambling and are not taxable in the UK and some other countries. HMRC won’t be snooping around your earnings for capital gains tax and there are no tax avoidance dangers. Lastly, the margin required is much lower. Typically, the bet will require a 5% deposit. Online calculators are available to work out required margins, but in this case, it would be around $845—which is much smaller than the outlay of $16,900 for a standard share purchase.

Spread Betting vs. CFD Trading

Spread betting and CFD trading share many similarities. Both are derivative forms of trading that are based on the price movement of the underlying asset, rather than owning the asset itself. Both allow traders to go long or short, and both allow investors to trade with leverage. The two instruments offer access to a wide range of markets and open doors for traders both in the short and long term.

With that said, there are some key differences. Firstly, spread betting is not subject to tax in many countries, whereas CFDs are. Also, spread betting is not allowed in some countries like the US, whereas CFDs can be traded almost anywhere. Fees also differ between the two, with CFDs more likely to charge commission on top of spreads.

Knowing which is right for you comes down to personal preference. The subtle differences could make CFDs best for one person while spread betting is preferable for another.

Spread Betting & Swing Trading

Swing trading also pairs well with spread betting. Swing traders aim to profit from medium to long-term upswings and downswings in the market. Typically, swing traders will place their spread bets over days or weeks to benefit from the entire upward or downward trend.

If you are looking to spread bet for a full time job as a living and generate income, adopting swing trading techniques could help prevent trades that are big losers and mistakes that come from riskier day trading and scalping.

Glossary

Terminology and jargon can be confusing. This glossary covers a few of the main terms you should understand before you get started:

• Bet size: This is the amount you stake for each point of movement in the market. This decides how much you stand to make or lose.
• Spread: The difference between the buy and sell price. Spreads tend to be based on live market data. You may also find some forex brokers with zero spreads, but this is rare.
• Up bet: A bet placed where the trader believes the value of the asset will rise.
• Down bet: A bet placed where the trader believes the value of the asset will fall.
• Expiration: This is the date on which the bet will close and be settled.
• Guaranteed stop loss: A type of limit order that means your position will automatically be closed to prevent further losses.
• NMS (Normal Market Size): More commonly known as Exchange Market Size. This represents the number of shares a spread betting market maker is compelled to quote on.
• Margin: The amount of capital a trader is required to deposit to make a spread bet when using leverage.
• Margin call: This happens when the losses on positions exceed the amount of money you are required to have in your account (the margin). It requires the account holder to deposit more cash.

Taxes

Spread betting tax rules vary greatly between different countries. In the UK, for example, it is classed in the same bracket as gambling and is therefore not subject to tax. However, if it becomes your sole income, you may have to pay.

Tax laws vary for non-UK residents. Make sure you do your homework before you start trading because some countries could allow you to write off losses, while others expect taxes to be paid on all profits.

Note, tax avoidance can have serious consequences. The best advice we can give you is to avoid disasters by carefully researching and consulting a professional tax advisor.

Pros

The key benefits of spread betting include:

• Tax-free based on location
• Access almost any market
• Trade with leverage
• Hedging is possible
• Low capital outlay
• Strong regulation
• No commission

Cons

Every trading method has its drawbacks. These are the downsides of spread betting brokers:

• Potentially large losses with winners and losers
• Some stories of scams and nightmares
• Holding costs
• High spreads
• Addiction

Trading Strategies

Every spread betting pro focuses on strategy. But strategies can be confusing at first, so we have covered a couple of our favorites.

Technical Analysis

Historical data can be the key to successful spread betting. Study graphs and patterns and you may just spot a repeating trend. Each broker will offer varying tools that assist your technical analysis, such as moving average and volume indicators. Using these tools and charts to your advantage can give you an edge over other traders.

Trade the News

Don’t like the idea of studying charts, graphs, and data? There’s another way. News events can have a huge impact on prices, especially big corporate events. If a company announces a takeover, there will likely be big changes to its stock price, for example. Buy and sell spread bets based on news stories and you could profit.

Spread Betting Tips

These tips will help you become a spread betting guru whether you are in the UK, Germany, or elsewhere:

Keep Learning

One of the most important things to remember when spread betting is to always keep learning. Fortunately, there are large numbers of resources available. Formal courses, lessons, and webinars are available around the world, as well as books, eBooks, and magazines. For those who want something less formal, there are loads of blogs, forums, plus videos and tutorials where investors share strategies and tips.

Robots and Signals

Technology can improve the efficiency of your spread betting antics. Trading bots (robots) use algorithms to automatically open and close trades on your behalf, allowing you to place more trades during each day. If you want more input, you can subscribe to a signals service that will advise you on trades that could be profitable, taking away the need for research.

Risk Management

Risk management and money management are important for any type of trading, and spread betting is no different. Try to avoid risking more than 2% of your account balance on any trade. Also, place stop-loss and take-profit orders on your bets to ensure your losses don’t build up and you don’t miss out on any profits.

Keep a Trading Journal

It can be difficult to keep track of what trades are performing well. One of the best things you can do is keep a trading journal on something as simple as an excel spreadsheet. Record things like bet size, entry and exit point, price, and profit or loss. This will help you identify areas for improvement as well as things that are working well.

Bottom Line on Spread Betting Brokers

Spread betting can be an effective trading method. If you’re already swing trading, it could be right for you with access to a range of markets, the option to go short or long, and numerous tax benefits. It won’t be easy money but spread betting could be the start of your journey to becoming a millionaire. Follow our guide and tips to ensure you have the best chance of succeeding.

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