Spread Betting was devised as an alternative to the traditional wager, which is based on a fixed odds, or ‘win-lose’ scenario.  So rather than betting on whether a particular stock or index will go up or down, a spread is a range of outcomes, and the bet is whether the outcome will be above or below the spread, whilst allowing increased return on capital.

The largest part of the UK market for Spread Betting concerns Financial Spread Betting. This market is similar to the futures and options market in that as it allows the investor to either hedge existing investments, or speculate on price movements in the market.  There are also mechanisms available through most spread betting accounts to allow for ‘stop losses’.  This is where the system is set to ‘sell’ the position out at a fixed price, should the bet move in to a losing position.  To cover their risk, most spread betting companies will require a deposit in the client’s account to cover this potential loss, known as ‘margin’.

Financial Spread Betting Example

Suppose Barclays is trading at 99p bid and 100p offer, and a spread betting company is offering 98-101p.  An investor who believes that the share price will rise might buy at £10 per point (i.e. profit by £10 for every penny over 100p).  The total loss possible for that investor – should Barclays go to 0p – is £1,010, being £10 times the movement down from 100.  This is practically the same as the cost of investing in 1,000 Barclays shares, with the same potential profit or loss.

At any time, the investor can ‘close’ the position. If the price rises to – say - 120p, the investor would make £190 profit.   If the price falls to – say 80p – the investor would lose £210.

So how does this differ from actually investing in the 1,000 Barclays shares via an equity purchase?  The loss or gain is the same.  In fact it differs in a number of significant respects:

• The transaction does not have a stamp duty. The 0.5% levy on purchases would have cost our investor £5 up front.
• There are no stockbroker commissions on purchases or sales, these are made by the spread betting company through slightly wider spreads. Commissions on buying and selling would have added and additional c£20 to our investor’s costs. 
• Purchase of 1,000 shares would therefore require an upfront payment of approximately £1,015.  As a spread betting company would only require a deposit to cover the ‘margin’ (perhaps 10% on this type of stock), the upfront payment would only need to be £101.
• Profits on spread bets are currently tax free to the customer in the UK.
  As the bets are executed ‘off-exchange’ they are not subject to market opening hours.

In summary, spread betting allows the knowledgeable trader to either hedge their existing equity portfolio, or seek to use the ‘leverage’ afforded by this kind of product to make significant stand alone profits.