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Introduction to spread betting

All trading involves risk. Losses can exceed deposits.

What is spread betting?

Spread betting is a way of speculating on an outcome, where your degree of accuracy determines the size of your profit (or loss). It differs from alternatives such as fixed-odds betting, where you have a simple win/lose outcome and a pre-defined payout or loss.

When financial spread betting, the outcome you're speculating on is the direction in which the price of a financial instrument will move. If it moves the way you predict, your profit will grow the further it goes. However, if the market moves against you, your loss will also increase as the price movement becomes greater.

Spread betting gets its name from the spread that all providers wrap around the underlying market price. Financial spread betting enables you to bet on whether the price of a financial instrument will move above or below a given spread.

We are the world's number one spread betting provider1,due to our award-winning technology, competitive spreads and premium service.

It’s worth emphasising that a spread bet is a bet: as you never physically own the underlying instrument, you can potentially profit from both rising and falling prices. There are also a number of other advantages to spread betting, including beneficial tax treatment 2 – we’ll go into more detail on these below.

Spread betting is a leveraged product and can result in losses that exceed your initial deposit.

1 Number of active UK financial spread betting accounts (Investment Trends UK Leveraged Trading Report October 2016).

2 Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.

How does spread betting work?

When you spread bet, you’re betting on whether the price of an underlying asset will rise or fall.

If you believe an asset’s price is going to rise, you place a ‘Buy’ bet. If you think the asset’s price is going to fall, you place a ‘Sell’ bet. The performance of the market governs not just whether you win or lose, but how much.

So let’s say you back a market to rise: you’ll make more the further the market rises, and lose more the further it declines. The same rule applies if you back a market to fall: you’ll make more the further the market falls, and lose more the further the market rises.

Let’s take a close look at the components of a spread bet.

 

The buy and sell price

We'll quote a two-way price on each market. This comprises the bid price and the offer price. The difference between these prices is known as the spread.

If you think a market is set to rise you ‘Buy’ at the offer (higher) price, and if you think the market is set to fall you ‘Sell’ at the bid (lower) price.

The bet size

We measure the price movements of the underlying market in points. So for equities, for example, one penny movement in the underlying market would equal one point. The movement of a whole index, however, is simply measured in points.

The amount you choose to bet per point of movement is up to you, as long as it meets the minimum bet size we accept for that market. Your profit or loss is the difference in points between the opening price and the closing price, multiplied by the value of your bet per point.

For example, if you open a £2/point bet on the FTSE 100 and it moves 60 points in your favour, your profit would be £2 x 60 points = £120. If it moved 60 points against you, you would lose £120.

Bet duration

All spread bets have an expiry. You are, however, free to close them at any point before their designated expiry time, assuming the spread bet is open for trading.

There are two types of spread bet: daily funded bets that run for as long as you choose to keep them open, and those that expire at the end of a quarterly period.

Daily funded bets offer our tightest available spreads, with a default expiry some way off in the future. You can keep your position open as long as you want, and we'll make an adjustment to your balance to reflect the funding costs of your position for each day that the bet remains open. You would generally use a daily bet to speculate on short-term market movements.

Quarterly bets are futures bets that expire at a specified date before the end of a given quarter. These bets have funding costs built into the spread. You can roll quarterly bets into the next quarter if you let your provider know in advance.

 

Example: spread betting on Microsoft

1. Let’s say that Microsoft Corp is currently priced at $25 per share.
2. Philip thinks the price is going to rise, so he decides to place a spread bet.
3. We're offering Microsoft Corp at a bid/offer spread of 2495/2505. This means that he can ‘Buy’ at the offer price of 2505, or ‘Sell’ at the bid price of 2495.
4. Philip decides to ‘buy’ $1 per point at 2505. On US shares, a point is equal to a cent movement in the share price.
5. On the back of a positive earnings forecast, Microsoft Corp rises to a market price of 2625. Let's say we now offer a price of 2620/2630.
6. Philip decides to close his position by ‘Selling’ at the bid price of 2620. This is 115 points above his buying price of 2505.

Philip's profit in this case is calculated by subtracting the opening price from the closing price: 2620 - 2505 = 115.

And because he 'bought' $1 per point, his actual profit is $1 x 115 = $115.

Reasons to spread bet

 

Tax free*

As it’s classed as gambling, you won’t have to pay any tax on your profits.

Spread betting is a leveraged product and can result in losses that exceed your initial deposit.

*Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.

Small margins

Spread betting is a leveraged product, which means that you don’t have to put up the full value of your position in order to trade. Find out more about this in our leverage section.

Shorting the market

As you are simply placing a bet on the direction in which an asset’s price will move, you can potentially profit from falling markets as well as rising markets. To find out more about this please visit our short-selling module.

Quick execution

You can open a spread bet almost instantly. We execute over 99% of deals in 0.1 seconds or less.** In most cases you’ll simply pick your market, your bet size and whether you want to 'buy' or 'sell', and then hit confirm to open your position.

**99.51% of trades executed by IG globally in 0.1 seconds, January 2013 – May 2013.

Thousands of markets

IG offers spread bets on a huge range of markets, including forex, indices, shares, commodities, interest rates, options, digital 100s and more, all from one account. As you never own the underlying instrument, this means you’re able to deal on markets that you couldn’t otherwise own, such as whole stock indices.

24-hour dealing

We offer round-the-clock dealing on certain markets, meaning that you can open and close positions even if the underlying market is shut.

 

Risks of spread betting

Unlike most traditional financial dealing services, spread betting is a leveraged product. This means that your initial deposit payment gives you exposure to a comparatively larger portion of an underlying market than if you bought the instrument directly (via a stockbroker for example).

Consequently, spread betting can result in losses that exceed your initial deposit. And without good risk management, it becomes possible to make significant losses over a short period of time. It is therefore important to understand risk and learn how to manage your exposure to risk effectively.

Ways of managing risk

There are a number of techniques available to help you manage your risk and take a sensible approach to your dealing. Visit our managing risk section to find out more.