Some Thoughts on Spread Betting

What is spread betting?

Spread betting is a speculative activity to make money by taking advantage of price movements of financial assets without actually owning the asset. This is a tax-free form of gambling in the UK. Many people have tried this type of betting but be aware that many loose! Here is an article from Guardian about the subject.

In spread betting, you basically predict whether a particular asset will increase or decrease in market price. If your market prediction is correct, you profit from this movement and if your market prediction is wrong, you incur a loss instead.

The more accurate your prediction, the higher your profits and equally, the further you are from the actual market movement, the greater your losses. When you bet that the market price of an asset will increase, this is referred to as going long and when you bet that the asset’s market price will decrease – this is otherwise referred to as going short.

What is a spread?

spread bettingThe term spread refers to the relationship between the two prices that affect or influence the market price movement of the underlying asset. These two prices are commonly known as the bid price and the offer price.

All costs that arise out of the speculative trading of financial assets are incorporated into these prices thus ensuring that the buying price will always be a bit higher than the market price and the selling price will be a bit lower than the market price.

For example, if a particular financial asset is trading at 7545.5 and has a one point spread, the offer price would be 7546 and the bid price would be 7545 respectively. In a nutshell, spread betting involves placing a bet on the likelihood of a financial asset either moving above or below the spread.

Advantages of spread betting

Tax-free – One of the biggest advantages of this form of gambling is that it is tax-free and therefore any profits you make are all yours. You will not have to fill any forms or documentation to declare your gains on your annual tax return reporting.

Consequently, though, any losses you make out of spread betting cannot be offset against any capital gains that you may have made elsewhere. Note that these are regulations that can change so always check the current tax regulations!

Controlled bets – It is important to note that profits and losses on spread bets can be open-ended and that means that you will not know beforehand how much profit or loss you will make initially.

There are however controlled risk bets offered by brokers that involve fixing the limit of potential risks and this provides better peace of mind even though they tend to be more expensive than a normal spread betting trade.