Beginner’s Guide to Spread Betting: What it is, how it works and why choose it?
What is financial spread betting?
Spread betting is a tax-free alternative to financial trading, which gives you the opportunity to trade on the price movements of the financial markets irrespective of whether they’re rising or falling. You’re not actually possessing the asset you bet on, but just betting on its price.
How it works?
The outcome you’re speculating on is whether the price of an underlying asset will move up or down. If it moves the way you predicted, your profit will grow with that move. If it moves in the opposite direction – your loss will increase as the move becomes bigger.
What are the types of bets and when to place what bet?
With financial spread betting you can place two different types of bets – buy bets and sell bets. According to the direction of the price you can gain profit or incur a loss.
Let’s say you expect the price of the particular instrument to rise. Then you place a buy bet (or you “go long”). If the price of the instrument increases, your profits will grow too. But if the price falls, you will incur losses and they will increase as the move becomes bigger.
And if you expect that the price will fall, you place a sell bet (or you “go short”). In this case, your profits will grow with any fall of the price and losses will increase with any rise.
What is a stake?
With spread betting the movement in prices is measured in points. You can choose the amount to bet per point.
With DF Markets your stake can vary from £1 to the amount you wish to bet per point (there’s no maximum value). Keep in mind that, for every point an instrument moves in your favour, you gain multiples of your stake. And for every point it moves in the opposite – you lose multiples of the stake.
What is leverage?
Spread betting is a leveraged product, which means that you can take a position by depositing just a small fraction of the total trade value.
For example with DF Markets, the leverage for some Forex currency pairs is 1:400. This means that to place a bet worth £10,000, you’d only have to deposit £25 to open your position.
Note: Keep in mind that these £25 will be enough to open your position in this particular case, but not to keep it opened in some cases.
This may be good in some cases, however, it may increase your profits just as much as your loses, so be very careful when using high leverage.
What is a spread?
The so-called “spread” is the difference between the sell and the buy price. So if we have sell/buy prices of 2995/3005, the spread is 10 points.
Here’s one example to fully illustrate how the spread betting works:
— Let’s say that company XYZ is priced at £30 (3000 points) per share at the moment.
— So your friend George thinks that the price is going to rise. He decides to spread bet.
— We are offering company XYZ at a sell/buy price of 2995/3005. So George can “Buy” at the price of 3005 and “Sell” at the price of 2995.
— George decides to “Buy” one share at 3005. He also decides his stake will be £2 per point.
— Next the price of XYZ’s shares rises to 3055. Now the sell/buy price is 3050/3060
— George decides to “Sell” and close his position at the sell price of 3050. This is 45 points above his buying price of 3005.
— George’s profit is calculated by multiplying the bet size by the difference in points, so £2 x 45 points = £90 profit! If the price had decreased 45p (to 2960), George would have incurred a £2 x 45 points = £90 loss!
Why choose financial spread betting?
No capital gains tax and no stamp duty on your earnings. *
Still, more than 1,000 markets at your fingertips 24/5
A lot of financial markets to choose from – Forex, Shares, Gold&Silver, Indices and more.
Leverage as high as 400:1
To place bigger trades but use it wisely as it may increase your losses.
Why choose financial spread betting with DF Markets?
Yes, you read right.
Tight spreads, low margins
DF Markets offers you competitive trading conditions with low margins and tight spreads.
Easy to use trading platform
User-friendly platform available on desktop, web and mobile.
We’re UK based, FCA regulated company
As a financial provider, DF markets is regulated by the UK Financial Conduct Authority (FCA). We treat our customers fairly and provide honest, effective and fair markets.
Personal account manager
To fulfil your needs and answer your questions.
We hope that now you understand more how financial spread betting works.
Risk Warning: Remember that Spread Bets are leveraged products that carry a high level of risk to your capital and may not be suitable for all investors. You may lose more than your initial investment! Ensure you fully understand the risks involved and seek independent advice if necessary.
*Disclaimer: Tax treatment is dependent on individual circumstances and tax laws are subject to change.