What is Spread Betting
The one thing traders want is market movement – up, down, and even sideways. Each price action provides its own opportunity to make money.
In Spread Betting, the trader places a bet on whether the market will go up or down, but without ever owning the underlying asset. Profits or losses are determined by calling the market correctly. So if you trade with the belief that an asset’s price will rise and it does, you profit. If it drops, you lose money. If you trade under the assumption that it will fall and it falls, you also profit. However if it rises when you wagered that it would fall, you lose money. Profits and losses are also determined by the amount of money bet on each price unit movement.
Spread Betting is most popular with UK residents, where profits from Spread Betting are tax-free . This is a key difference between CFD trading and Spread Betting. In Spread Betting, the trader is ‘betting’ per point move. That means that this activity falls outside the scope of Capital Gains Tax or stamp duties unlike other more traditional types of trading.. With Spread Betting, you can trade all the same financial instruments as a standard Forex or CFD account including Forex pairs, commodities, indices, or stocks.
How Does Spread Betting Work? Here’s a Practical Example
Suppose David thinks the EURUSD exchange rate will rise in value. He places a BUY bet of 1 GBP per pip (0.0001).
This means that for every pip that the EURUSD rate rises, David gains 1 GBP. Conversely, for every pip it falls, he can lose 1 GBP.
What Does David's Trade Cost?
The equation can be broken down as follows: 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 GBP.
Spread betting is a tax free trading method available for UK residents only. Learn more about Spread Betting and the Spread Betting UK trading platforms
* Note that tax on Spread Betting is 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 bet on whether to go long or short the financial instrument in question. Should the market react in the manner predicted, then the trader makes a profit.
For example, if you believe that the price of Apple shares is going to rise, you can open a bet on Apple accordingly. You decide how much you want to wager per point move. A point move for a stock is 0.01. That is the minimum amount that the stock can move. This can be quoted in US Dollars, GB Pounds, or Euros, but this doesn’t really matter as you will place bets in the currency of the UK Spread Betting Account (GB Pound). So, let’s say you decide to bet 1 GBP per point on the price of Apple Shares. You placed your bet when Apple was quoted at 110.50 USD. You were correct in your analysis and Apple rises to 110.90 USD. This means Apple rose 0.40 USD or 40 points. You then close your bet. Since you bet 1 GBP per point, you made a profit of 40 GBP on this bet.
There is, of course, the risk that Apple shares will fall in value when the bet was open, which results in a loss. In the same example, if Apple shares had fallen to 110.30 GBP, and you closed your position at that point, you would incur a loss of 20 GBP.
The key element in Spread Betting is that instead of buying a number of shares (for example 100 Apple shares) you are betting a monetary value (1 GBP, in our example) per point move (0.01 in the case of Apple shares) with the hope that Apple shares will rise in value.
Trading With Leverage
Leverage, or margin trading, is a useful tool for traders. It enables them to open trading positions that are larger than the principal in their personal trading account. When trading currencies, for example, traders can access leverage of 30:1. This means they only need to hold 1 GBP for every 30 GBP represented in the position. This margin equals 0.333% of the position’s value. There are several advantages to leverage trading, and it is a commonly- used feature on many instruments. The leverage ratio may change depending on the instrument traded. For example, many shares only have a leverage of 5:1 or 20% margin. Leverage is therefore a powerful tool for potentially enhancing a traders’ profits. However, it works both ways, and leverage can magnify traders’ losses as well. Therefore, it is important to manage risk when trading and to utilise your trading leverage in an appropriate manner.
Spread Betting Compared
Usually when placing a bet, you are anticipating a particular outcome. For example, if you expect your favorite team to win a match, then you place a bet for it to win. There are only two possible outcomes for this event – win or lose.
In financial Spread Betting, you place a bet that the price of a certain instrument will be higher or lower in the future. If you call the direction correctly, you profit. Likewise, if you are wrong, the more you lose. Whatever the outcome is, it is the bettor who ultimately decides when to close the position.
The main difference between Spread Betting and CFD trading is that profits earned from Spread Betting are exempt from capital gains tax in the UK. Conversely, profits earned from CFD trading are usually liable for capital gains tax.
Is Spread Betting for Me?
Spread betting offers a full range of financial instruments to trade in a simple betting per point/pip model. It can all be done on AvaTrade’s easy-to-navigate MetaTrader 4. 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 taking advantage of 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 benefit from one of the most cost-effective ways of trading the markets. You may also try it out by opening 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 AvaTrade Spread Betting Trading platform. (LINK to reg form)
- Spread Betting with Leverage
When Spread Betting with AvaTrade, you can enjoy up to 400:1* leverage on your Spread Betting account. Leveraged trading, also known as trading on margin, enables UK traders to open larger positions in the market than those available to them from their existing capital.
Leverage is a very powerful tool that enables traders to earn greater profits with a smaller principal, thus magnifying profits. However, at the same time, the losses can be larger due to the leveraged trading. This is a crucial factor that each trader must consider.
*Applies to Forex pairs. Maximum available leverage varies between markets and financial instruments. - Spread Betting Markets
AvaTrade, a premier Spread Betting broker in the UK, 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, bonds from across the world, and a large variety of equities and ETFs. With such a large variety of financial products, you are sure to find the instruments that suit you.
Why should you Spread Bet 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 1000 financial instruments - FX pairs, indices, equities & bonds
- Segregated bank accounts - ensuring the security of your funds
- Personal Account Manager - working within a 24/5 Customer Service team
Now that you know what Spread Betting is, continue to our guides on How Spread Betting Works and Spread Betting vs. CFDs.
Eager to try? Open an account with AvaTrade and start Spread Betting tax-free!
What is Spread Betting main FAQs
Spread betting is a financial derivative that allows you to speculate on the price movements of various financial instruments, such as stocks, currencies, commodities, and indices. Instead of owning the underlying asset, you place a bet on whether the price will rise or fall.
Spread betting offers several advantages, including the ability to profit from both rising and falling markets. It also provides leverage, allowing you to control a larger position with a smaller amount of capital. Additionally, spread betting is tax-free in many jurisdictions, including UK.
Spread betting covers a wide range of markets, including stocks, indices, currencies (forex), commodities, and bonds. This diversity allows traders to choose instruments that align with their expertise and market preferences.
No, one of the advantages of spread betting is the ability to start with a relatively small amount of capital - just 100 GBP. This is because you don't need to purchase the underlying asset, and leverage allows you to control larger positions. However, it's crucial to trade responsibly and be aware of the potential for amplified losses.
