What is Spread Betting?
In spread betting the trader places a bet if the market will go up or down. There is no acquiring done of any instrument or its contract for difference, rather simply betting on the market trends. The profits or losses are determined by the changes in value and not by the closing price. Spread Betting is mostly done by UK residents, as profits from spread betting are tax free in those countries. As the trader is ‘betting’ per point move, it means this type of trading falls outside the scope of Capital Gains Tax or stamp duty when compared to other types of trading. When Spread Betting you can trade all the same financial instruments as a standard forex or CFD account including forex trading pairs, commodities, indices or trading stocks.
Here’s a practical example
David thinks the EURUSD exchange rate will rise in value.
He places a BUY bet of £1 GBP per pip (0.0001).
This means for every pip the EURUSD rate rises David will profit £1 GBP.
Conversely, for every pip it falls he will lose £1 GBP.
Spread betting example: How much does David’s trade cost?
Bet size per pip X Spread = Spread charged.
Each financial instrument has its own spread, which is the cost of the trade.
When spread betting the total spread charged is the bet size multiplied by the spread for that instrument.
In David’s example he bets £1 GBP per pip times the EUR/USD spread which is 1.8 pips.
So the total spread charged for David’s position is £1 .80.
Spread betting is a tax free trading method available for UK residents only. Learn more about Spread Betting and the Spread Betting trading platform
* Spread-Betting is exempt from stamp duty and Capital Gains Tax in the UK. Please note that tax laws are liable to change and may differ based on your individual circumstances and jurisdiction.
How to conduct Spread Betting?
Spread Betting requires the same level of research, analysis and knowledge as any other type of trading. The UK trader decides to buy (go long) or sell (go short) the financial instrument in question, and should the market react in the manner he predicted profits will be gained.
For example, if we believe that the price of Apple shares is going to rise, we can open a buy bet on Apple. We then decide how much we want to bet per point move. A point move for a stock is usually 0.01 i.e. the minimum amount that stock price can move. That can be quoted in US Dollars, UK Pounds, Euros etc. This does not really matter as we place bets in the currency of the Spread Betting Account (UK Pound). So say we decide to bet £1 per point on the price of Apple Shares. We opened our trade when Apple was quoted at $110.50. We were correct in our analysis and Apple rises to $110.90. This means Apple rose $0.40 or 40 points. We close our trade. As we bet £1 per point, we make profit of £40 on this trade. We were correct in our analysis and Apple shares rise to £110.90. This means Apple shares rose £0.40 or 40 points. We close our trade. As we bet £1 per point, we make a profit of £40 on this trade.Follow the link for an additional example of a spread bet.
There is, of course, the risk that Apple shares will fall in value when we had our buy bet open which will result in a loss. In the same example, if Apple shares had fallen to £110.30, and we closed our trade at that point, we would incur a loss of £20.
The key difference of Spread Betting is therefore that instead of buying an amount of shares (e.g. 100 Apple shares) we are betting a monetary amount (£1 in our example) per point move (0.01 in the case of Apple shares).
Trading With Leverage
Leverage, or margin trading, is a useful tool for traders. It allows them to open trading positions which are larger than what they would otherwise be able to with just their balance alone. When trading currencies, for example, traders can access leverage of 400:1; i.e. they need to use only £1 for every £400 worth on the position. Its margin equivalent comes to 0.25% of the position’s value. There are a few advantages to leverage trading, and it is a commonly used trading feature on many instruments. The leverage ratio may change depending on the instrument traded; for example many shares only have leverage of 20:1 or 5% margin. Leverage is therefore a powerful tool for enhancing traders’ profits. However, it works both ways and leverage can magnify traders’ losses. Therefore, it is important to manage your risks when trading and utilise your trading leverage in the correct manner.
Spread Betting Compared
- Spread Betting vs. Regular Betting
Usually when placing a bet, you are looking for a particular outcome. For example, if you expect your favorite team to win the match, then you will place a bet for it to win. There are only two possible outcomes for this event – win or loss- which are set in advance.
In financial Spread Betting, the outcome is not fixed in advance. Instead you place a bet that the price of a certain instrument will be higher or lower in the future. The more you are right about the trend of movement, the more you will earn. The more you are wrong, the more you will lose. Whatever the outcome is, it is the trader who decides when to close the position.
- Spread Betting vs. FX/CFD Trading
Spread Betting is similar to traditional Forex and CFD trading. However, instead of buying an amount or lot size of the financial instrument, a spread bettor places a bet per pip movement or point movement of the given instrument.
On a traditional CFD and FX trading platform, the amount you enter in the volume box therefore refers to the amount of units of the instrument you wish to buy or sell.
For example, entering 0.10 into the volume box refers to 10,000 units of an FX pair, 100 barrels of crude oil or 10 ounces of gold.
However, on the spread betting platform, entering 0.10 in the volume box refers to the size of the bet per pip move e.g. 10p per FX pip (0.0001), 10p per point move of crude oil (0.01) etc. For further explanation, take a look at a detailed example of spread betting
Note: The value of 1 pip changes from one financial instrument to another.
|FX & CFD Trading||Spread Betting Trading|
|Range of Markets||+200 (FX, commodities, indices, equities, bonds and ETFs)||+200 (FX, commodities, indices, equities, bonds and ETFs)|
|Minimum Trade Size||From 0.01 lot||From 0.10 (10 per point on Forex trading and most other instruments).|
|Account Currency||EUR, GBP, USD||GBP|
|Platforms||MetaTrader 4 & AvaTradeGo||MetaTrader 4|
|Tax Free Profits||No||Yes|
How to Calculate the Cost of a Spread Betting position?
The cost of placing a financial spread bet is known as the spread. Each financial instrument has its own spread. This spread is multiplied by the size of your bet size to give the overall cost of the trade.
For example the EURUSD has a typical spread of 1.8 pips. If a spread bettor is trading at £1 per pip then the total spread charged is £1.80*
*Spread betting accounts are available in GBP denominated currency
Is Spread Betting for Me?
Spread betting offers a full range of financial instruments to trade in a simple betting per point/pip model on the easy to navigate MetaTrader 4 trading platform. The reason spread betting is so popular in the UK is because profits are completely free from Capital Gains Tax & Stamp Duty. Along with the tight spreads available, spread betting is therefore an extremely cost-effective way of trading the financial markets. This is also true when compared to traditional FX / CFD trading or even investing and buying stocks or other financial products. If you are a resident in the UK, open your spread betting account today and start profiting from the most cost effective way of trading the markets. You may also try it out by open a risk-free demo account.
How to Spread Bet with AvaTrade?
- Spread Betting Platform
AvaTrade is committed to providing its traders with the best trading platform and trading tools available. The MT4-Spread Betting platform is the world’s most popular and customizable trading platform. With hundreds of financial instruments available, live price trading charts tailored to your needs and technical and fundamental analysis tools, the MT4 platform is the most innovative and flexible trading terminal available to retail traders. Learn more about the MT4 – Spread Betting Trading platform.
- Spread Betting with Leverage
When spread betting with AvaTrade you can enjoy up to leverage* on your spread betting account.
Leveraged trading, also known as trading on margin, allows UK traders to open greater positions in the market than what their capital might otherwise allow.
Leverage is a very powerful tool which enables traders to earn greater profits with smaller capital, thus magnifying profits. However, at the same time the losses might be larger due to the leveraged trading. This is an important factor each trader must take into account.
*Applies to Forex pairs. Maximum available leverage varies between markets and financial instruments.
- Spread Betting Markets
AvaTrade offers its traders leveraged spread betting on a full range of markets, including more than 65 forex currency pairs, metals, energies & agricultural commodities, major indices and bonds from across the world, and a large variety of equities and ETFs. With such a large variety, you are sure to find the instruments that suit you.
Why should you Spread Betting with AvaTrade?
- Tax-free trading UK – Profits are exempt from Capital Gains Tax & Stamp Duty**
- Trade with a trusted forex broker – regulated in UK (MiFiD)
- Spread bet on more than 200 financial instruments – FX pairs, indices, equities & bonds
- Segregated bank accounts – ensuring the safety of your funds
- Personal Account Manager – alongside a 24/5 customer service team