Spread Betting - The risks and Rewards

Spread betting is used to describe a type of betting that bets on outcome of an event and where the punters reward

Spread betting is used to describe a type of betting that bets on outcome of an event and where the punters reward is based on the accuracy of their forecast  or prediction contained in their bet. It is not a simple "win or lose" outcome. The spread is the range of outcomes, and the wager made is on how far the outcome or result will be above or below the spread.

Spread betting has been a major growth market in the UK in recent years, with the number of gamblers heading towards one million.

Spread betting carries a high level of risk, with potential losses or gains far in excess of the original money wagered.  Many users would also want to consider CFD trading if this activity appeals.   We have a CFD brocure request service here.

In the UK, spread betting is regulated by the Financial Services Authority rather than the Gambling Commission.

The aim of spread betting is to be able generate an active market for views of the spread.  It aim to do this even when the outcome of an event may appear to be strongly biased in favour of one end of the spread.

Illustration
If Manchester United were playing Little Wopping Rovers in a FA Cup round In normal betting most of the bets would be for a Manchester United Win very few would be betting on Little Wopping.  Using a "point spread" evens out this market and can create an equal number of punters on each side of the bet.

This allows the bookmaker to make a market and accept wagers on both sides of the spread. The bookmaker charges a commission and acts as the counter party for each participant.  he Bookmaker (market maker) is unconcerned with the outcome as long as the size of the market on both sides are roughly in balance.  He will make his money from the commission.

Financial spread betting is by far the largest and most popular sector of spread betting in the UK. The leading spread-betting companies major source of business and their largest revenue  are from the Financial markets.

Financial spread betting in the United Kingdom works in a similar fashion to the options and Future markets (see below for a link to our CFD pages) but there significant differences which participants should understand..

• The [cost - commission] is incurred through a bid-offer spread is wider.
• The profits and losses incurred in spread betting are treated completely different by the Inland Revenue (HMRC) .
• Spread betting is more flexible. You can create positions outside normal trading hours.  The nature of the bets are not limited to definitions made by any exchange.  It may be possible to place stop losses. (see below)
• Spread betting is not exchange controlled. The contract is between the punter and the Bookmaker - Market making company It is NOT an exchange cleared transaction.  However t should be noted that although not subject to exchange regulations the firms offering spread betting are regulated by the FSA and subject to their detailed supervision.

The crucial difference between spread betting and fixed odds betting is that the amount the punter can win or lose in spread betting is unlimited where is fixed odds betting you can only lose your single stake.

Stops can work both ways

* A "stop loss" or "stop" automatically closes the bet when the spread has moved against the punter by an amount specified when setting the stop.. * A "stop win", "limit" automatically closes the bet when the spread moves and places the punter in profit by an amount specified when the stop limit is placed.

What can you bet on?

Spread betting is available on a wide range of activity not just the obvious Financial markets, Indices, sports events, currency, fixtures but on house prices or the number of Times that Gordon Brown mentions "hard working families" in his budget speech!

In a falling stock market financial spread betting can be a useful tool in hedging losses on a portfolio of shares where for tax or other reasons selling is not considered possible.

Tax treatment of Spread betting

If you make a profit from your spread betting activities they are currently free from Capital Gains Tax no matter what the punters personal circumstances.   They are also free from Income Tax  providing the punter can demonstrate that they have other income that can support them financially.  If however the profits from spread betting is the only source of income for a participant it is possible that HMRC (Her Majesty Revenue and Customs) will demand that income tax is due on these profits.

Spread betting example in the Financial markets

Marks and Spencers are trading on the market at 200p bid, and 201p offer. A spread-betting company is also offering 200-201p. This example is based on using cash and with no bet expiry date.

We think the share price is going to go up, so we bet £10 a point (i.e., £10 for every penny of share movement at 201p. We use the offer price since I am "buying" the share (betting on its increase) rather than selling ( betting on a decrease in the share price).

Note that my total loss (if Marks and Spencers  went to 0p) could be up to £2010, Therefore, this as risky as actually buying the underlying shares.

If a bet goes overnight, the punter is charged a financing cost (or receives it, if the punter is shorting/selling the stock). This is usually based on LIBOR + a certain percentage, of around 2/3%.

In the Marks and Spencers example if Marks and Spencers are trading at 201p, then for every day the bet is open a financing cost [taking finance cost to be 7%] ((201p x 10) * 7% / 365 ) is made.

The punter will also need a margin to cover the bet that is usually  5 or 10% of the total risk you are taking on but can go up to 100% on stocks that have poor and illiquid markets.

The punter normally receives all dividends and other corporate adjustments in the financing charge each night. Should marks and Spencers in this example go ex-dividend with a dividend of 20p. The punter's account will be credited with the value of the dividend.

Margin and Gearing

From the example above you can see that the effct of gearing has a dramtic effect by magnifying both losses and gains.  You MUST fully understand the risks of gearing before participating in this type of transaction.

Spread betting Services.

There are many Spread betting services on offer both here in the UK and overseas.  If they are operating in the UK they should be regulated by the FSA. Always check you can do so on the FSA web site.  Firms that offer spread betting in the UK but are based overseas must also be registered with the FSA.  Check before you do anthing else.

Many firsm will offer spread betting tutorials, spread betting training courses, free trail accounts where no real money is used.  Spread betting DVDs, books on-line videos explaining techniques and spread betting jargon are all available.

Spread betting the risks and dangers.

We have added some links below to various articles from national newspapers.  Financial spread betting is not an investment it is a gamble. It can be useful tool in managing the risk and reward of a portfolio of shares.  However you should read as much as you can.  Take professional advice and only risk what you can generally afford to lose.

Stop loss trading can prevent disasters but is guarantee of very nasty surprises.

It is generally accepted that only 1 in 5 make money from their spread betting activity. Proceed with caution, slowly and educate yourself as much as possible seems to be the sensible approach. Our pages on Contacts for Differnce (CFD trading) may also be of interest.