Spread betting explained

Spread bets work in a similar way to CFDs, but there are a few crucial differences to be aware of. Let’s look at how spread betting works and why you might choose to spread bet instead of trading CFDs.

• Understanding spread betting
• How does spread betting work?
• Spread betting example
• Benefits of spread betting
• How to start spread betting

Understanding spread betting

Spread betting is another popular way of speculating on financial markets while accessing leverage. It has similarities with CFD trading in that it also:

• Is a derivative
• Allows you to go long and short
• Is exempt from stamp duty
• Gives you access to thousands of markets
• Is charged via the spread

Unlike CFD trading, spread bets are completely tax free. You won’t pay stamp duty or capital gains tax.*

How does spread betting work?

Spread betting works by mimicking the result of a traditional investment, without the need to own the assets.

Instead, you’re just placing a bet on whether a market will rise or fall, putting up a certain amount of capital per point of movement – known as a bet size. The further the market moves in your chosen direction, the more you profit. The further it moves against you, the more you lose.

Another key feature of spread betting is the bet duration. Unlike CFDs, there is an expiry date put on each position. This fixed timescale can range from a day to several months away – and you can manually close your bet at any time.

Let’s look at an example of spread betting to see how this plays out.

Spread betting example

You’re expecting Apple’s share price to fall from its current level of $170 after its earnings results are released. You decide to open a daily spread bet, betting £20 per point that APPL stock will decline in value. As spread bets are leveraged, you’d only need to put down 20% of the total value of this trade to get started. That would be your £20 bet size multiplied by the current market price ($170), multiplied again by 0.2, giving you a margin requirement of $680.

There would be two potential outcomes:

• Your bet was correct, and shares of APPL fell. If the market declined by 50 points, you’d earn £1000 (50x20)
• Your bet was incorrect, and shares of APPL increased. If the market price rose by 25 points, you’d lose £500 (25x20)

Remember, spread bets are leveraged. Leverage can magnify your profits and losses as both will be based on the full exposure of the trade, not just the margin required to open it. 

Benefits of spread betting

While spread betting and CFDs are pretty similar products, there are a few reasons why UK residents might prefer the former.

• No capital gains tax*
• No commission on shares, just our spread
• Controlled deal sizes
• Trade international markets in sterling

How to start spread betting

The means of opening your spread betting position is broadly the same as CFDs.

1. Find your opportunity
2. Open a spread betting account – or a demo account 
3. Choose whether to go long or short
4. Fill out the deal ticket
5. Monitor and close your trade

The only real difference is that you’ll be entering a bet size in your deal ticket, as opposed to the number of contracts.

* Spread Betting and CFD Trading are exempt from UK stamp duty. Spread betting is also exempt from UK Capital Gains Tax. However, tax laws are subject to change and depend on individual circumstances. Please seek independent advice if necessary.