Spread betting is a form of gambling that involves speculating on the outcome of an event, such as the price of financial instruments or the result of a sports event, by betting on whether the outcome will be higher or lower than a ‘spread’ set by a bookmaker or a broker.
In financial spread betting, the bettor does not actually buy or sell the underlying asset (like stocks, currencies, commodities, or indices). Instead, they predict whether the price of the asset will rise or fall. The spread is the range of prices that the bookmaker or broker quotes for an event. It consists of two prices: a buy price (also called the ‘bid’ price) and a sell price (also called the ‘offer’ price’). The difference between these two prices is known as the spread.
Here’s how it works:
1. **Choosing a Market**: The bettor selects a market to bet on, such as the FTSE 100 index, the price of gold, or the exchange rate between two currencies.
2. **Determining the Spread**: The broker provides a spread for that market. For example, if the FTSE 100 is trading at 7,000, the broker might quote a spread of 6,999.5 to 7,000.5.
3. **Placing the Bet**: The bettor decides whether they think the market will rise or fall and places their bet accordingly. If they think it will rise, they ‘buy’ at the higher price (the bid price). If they think it will fall, they ‘sell’ at the lower price (the offer price).
4. **Calculating the Payout**: If the bettor’s prediction is correct, they will earn a profit based on the difference between the price at which they bet and the price at the end of the bet, multiplied by the size of their bet (often referred to as the ‘stake’). If they are wrong, they will lose their stake multiplied by the difference.
5. **Margin Requirements**: Spread betting often involves leverage, meaning bettors can stake more money than they have in their account. This is known as trading on margin, and it can amplify both gains and losses.
Spread betting is popular because it offers high leverage, the ability to go long or short (bet on rising or falling prices), and potential tax advantages in some jurisdictions, as profits are often not subject to capital gains tax or income tax. However, it is also highly risky, and losses can exceed initial deposits. It is important for individuals to understand the risks involved before engaging in spread betting.