What it means
A spread betting firm quotes two prices for a market, a lower sell price and a higher buy price. The gap between them is the spread, and it is the firm's built-in charge for each bet.
If you think the market will rise, you buy at the higher price. If you think it will fall, you sell at the lower price, and in either case you decide how much to win or lose per point of movement, for example $10 per point.
Your profit or loss is the number of points the price moves in your favour or against you, multiplied by your stake per point. A bet on a market that moves 60 points at $10 a point therefore makes or loses $600.
Spread bets are leveraged, which means you only put down a small deposit, called margin, to control a much larger position. This magnifies both gains and losses, and a small move against you can cost more than your deposit, so firms usually require extra money if your position goes the wrong way.
Many spread bettors use stop-loss orders, instructions that close a bet automatically if the price reaches a set level. These limit the loss but do not guarantee it, as in fast markets the price can jump past the stop level.
Spread betting is not suitable for everyone. It is regulated in the markets where it is offered, and rules, risk warnings and tax treatment vary by country and personal circumstances.
Anyone considering it should understand the risks fully, because many retail clients lose money.
In practice
Real-world examples.
Example
A trader expects a share index to rise after strong employment figures. She buys at $15 per point and closes the bet two days later after the index gains 40 points, earning 40 x 15 = $600.
Example
An investor with a portfolio of shares worries about a short-term market fall. He places a sell bet on the index to offset possible losses, which acts as a hedge, meaning a position that moves the other way to the portfolio.
Example
A beginner places a $5 per point bet on a currency pair and sets a stop-loss 50 points away. The price moves against him and the stop closes the bet, limiting his loss to roughly 50 x 5 = $250 plus any slippage. Because he chose the stake and the stop in advance, he knew his worst case before he started.
Formula
Calculation
Profit or loss = (closing price - opening price) x stake per point, for a buy bet
An index is quoted at 7,498 to sell and 7,502 to buy. An investor buys at 7,502 with a stake of $10 per point. Later the index is quoted at 7,562 to sell, and he closes the bet at 7,562. Profit = (7,562 - 7,502) x 10 = 60 x 10 = $600. Had the index fallen to 7,442 instead, the loss would have been (7,502 - 7,442) x 10 = 60 x 10 = $600.Case study
Seen in the real world.
Dalton Reid is an illustrative, fictional private investor who decided to try spread betting with a deposit of $2,000. He placed a buy bet on a share index at $20 per point, reasoning that a 50-point rise would earn $1,000.
The market fell 120 points in a day after unexpected news. His loss was 120 x 20 = $2,400, more than the whole deposit, and the firm demanded a further $400 to cover the shortfall.
The illustrative lesson is that the stake per point must be sized for the loss you can afford, not the gain you hope for. After this experience Dalton cut his stake to $2 per point and always set a stop-loss before opening a bet. At $2 per point, the same 120-point fall would have cost only $240, a loss he could comfortably absorb.
Watch out
Common mistakes.
- Treating a small deposit as the limit of what can be lost, when losses can exceed the deposit.
- Choosing a stake per point that is too large for the account, so that normal market swings trigger large losses.
- Ignoring the spread, which means every bet starts slightly in the red.
Questions
People also ask.
Do you own the asset in a spread bet?
No, you are only betting on the price movement, so you hold no shares, currency or commodity and receive no ownership rights.
What is the difference between spread betting and CFDs?
Both let you speculate on prices with leverage, but a spread bet is based on a stake per point and, in some countries, is treated differently for tax, so the rules should be checked locally.
Is spread betting available everywhere?
No, it is mainly offered in a small number of countries, and in many places it is restricted or not permitted, so availability depends on local regulation.
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