Basics of Financial Spread Betting Explained

A financial spread bet is a bet that the price of a financial instrument will move in a particular direction. The bet placed will either be that:

a) the price rises; or
b) the price falls

The important thing to note is that you are not betting on a specific outcome only that that the price will rise or fall. The more that the price moves in the direction of a bet, the greater the profit. The more that the price moves in the opposite direction to a bet, the greater the loss. Once a bet is closed the gain or loss is realised and funds are added or deducted from the trading account accordingly. In theory it's as simple as that!

Spread betting firms now quote on a whole breadth of available instruments and the bet could be on:

• a company share (e.g. HSBC, Vodafone)
• a stock index (e.g. FTSE100, Dow Jones);
• a commodity (e.g. Gold, Oil);
• a foreign exchange rate (e.g. Pound/Euro, Dollar/Yen); or
• one of the many other instruments which are traded on the financial markets (Bonds, Interest rates, options etc.)
  

Spread betting is treated under UK law as gambling and as a result is exempt from capital gains tax and, furthermore, trades are not subject to stamp duty. This has attracted many traders away from traditional share trading and consequently also attracted many traditional brokers into providing spread betting facilities. The proliferation of new providers has itself led to a great deal of competition and has made financial spread betting very focused on the retail customer.

Financial spread betting benefits in the tax sense by being classed as gambling but the dominant providers are not the traditional betting companies. They are generally owned by companies that specialise in currrency, commodity or derivative trading. There are a few notable exceptions on the market one of which is the Dublin based Paddy Power which is ostensibly centred around the traditional gambling markets.

Spread betting is also what is known as a margined product. This means that instead of paying £1000 to speculate on £1000 of equity exposure, say, you only need to have a fraction of these funds in your account to back this trade say 10%. This is known as the deposit margin. This aspect again makes spread betting an attractive prospect - although the down-side of this leveraging is that losses can quickly accumulate. (See Margins section)