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Revision as of 15:03, 24 June 2005
Spread betting is a form of gambling that allows traders to take a position on the future direction of a market or instrument, without owning the underlying. It differs from fixed odds conventional betting in that the outcome of the bet is not a binary event, i.e win a fixed amount or lose the entire stake, which means profits and losses can theoretically be unlimited and the open profit or loss will fluctuate continually until the bet is closed.
- The facilty to spread bet is provided by bookmakers who are regulated in much the same way as conventional bookmakers.
- The spread is simply a two-way price quoted by a bookmaker on a given market. A spread bettor buys at one end of the spread (the offer price) and sells at the other (the bid price), and if the spread has moved far enough in the right direction between the time he buys and sells (or sells and buys, as he may bet on either direction), he makes money. If it moves in the wrong direction, he loses. Meanwhile the bookmaker profits on every trade from the spread.
- A spread bet can be closed for a profit or loss at any time (assuming the company is quoting a price), unlike a fixed odds bet which must run to expiry before the outcome is known.
- The size of the initial stake determines how much profit or loss is made per unit move.
- Spread betting is treated as gambling and thus, in almost all cases, is tax free.
Let's say a spread betting company offers a spread of 10000-10004 on the price of the Dow Jones Industrial Average. 10000 is the 'sell' (or bid) price and 10004 is the 'buy' (or offer) price.
Suppose you think the index is going to rise. You make a Â£10 per point "buy" bet at 10004. Over the next few days the price does rise, and the spread quoted by the indexation company moves upward to 10050-10054.
At this point you might choose to "take your profit" and the way you do it is by making a Â£10 "sell" bet at 10050. Your profit on the two transactions would look like this:
Bought at: 10004
Sold at: 10050
Financial spread betting dates back to 1974 when IG Index was created specifically to enable people to trade the price of gold at a time when exchange controls prevented buying the metal itself without paying a hefty premium. Indeed, the name IG Index refers to Investors Gold Index.
For a few years IG had the market to itself, but it was eventually joined by City Index and Sporting Index (the latter's financial arm is known as Financial Spreads) and William Hill in the sports arena. In 2000, two new companies - Cantor Index and Spreadex - began competing with the established players, and as the number of companies in the sector has grown, so too has the range and types of bet offered.
Financial traders can bet on spreads of:
Sports fans can bet on spreads of:
Spreads are sometimes offered on unusual markets such as:
- The general election result
- The Big Brother television phenomenon.
- Spread betting profits are almost always tax-free (and losses non-tax-deductible) although in some cases if profits constitute a professional trader's only source of income then the Inland Revenue may choose to make the trader liable to income or capital gains tax.
- Losses and trade entries/exits can be controlled through the use of stops and [limit order]]s as in a conventional market.
- Access to a wide range of markets through a single account.
- No commission to pay on transactions
- Spreadbettors can trade on margin which ties up less capital than might be required to trade the underlying
- Spread betting is an artificial market. This means that the price quoted by a spread betting company may differ from the price of the underlying. Traders who participate in spread betting do not directly trade with other traders in a transparent centralised market place, as they are in effect trading with the spread betting firm.
- Accusations that spread betting companies manipulate their quotes and sometimes deny fills to the disadvantage of the trader abound, but may be unfounded.
- Wider spreads than provided in the underlying market.
- Execution can be slower than in the underlying market.
- Hidden costs, such as the overnight financing charge for holding long positions. This can really add up over time.
Related Trade2Win resources
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