What is Spread Betting?
Spread betting is a popular derivative product you can use to speculate on financial markets – such as forex, indices, commodities or shares – without getting ownership of the underlying asset. In actuality, you are placing a bet on whether you think the price will rise or fall.
This means that when you get it wrong, you lose the stake, because you didn't buy anything. This means that it is not trading, but betting.
Going long is the term used to describe placing a bet that the market price will increase over a certain timeframe, and going short or ‘shorting’ a market is the reverse – placing a bet that the market will decline.
So when you spread bet you own nothing, so it is not trading or 'trading on margins' as some call it, because you have nothing to trade. It is betting, just like betting on a horse, and about as good-a-way to turn a profit
There are two types of margin to consider when spread betting:
Deposit margin. This is the initial funding required to open the position, which is usually presented as a percentage of your total trade.This could be considered as your 'stake' when you bet, except that you do not get it back in addition to your winnings, should you speculate correctly.
Maintenance margin. This refers to the additional funds that might be required if your open position starts to incur losses that are not covered by the initial deposit. You’ll get a notification – known as a margin call – asking you to top up the funds or risk having your position closed, losing your stake.
That’s the biggest difference between betting and spread-betting, if you keep paying you can stay in the market until it starts to go your way and so it is highly addictive. It is also highly risky, 80% of all non-professional spread-betters lose all of their money.
CFDs are very similar to spread-betting but the contract for differences itself does actually have a value for the length of that contract which can be traded. CFD trading is illegal within the United States of America.
This means that CFDs are effectively speculating on spread-betting which is, as you can imagine, a highly risky proposition.
CFD trading also requires that the investor to pay commission charges and transaction fees to the provider; whereas with, spread betting no fees or commissions are taken. When the contract is closed and profits or losses are realized, the investor is either owed money or owes money to the trading company. If profits are realized, the CFD trader will net profit of the relative closing position, less opening position and fees.
Profits for spread bets will be the change in base points multiplied by the cash amount negotiated in the original bet.
Both CFDs and spread bets should be subject to dividend payouts, assuming a long position contract. Although there is no direct ownership of the asset, a provider should pay dividends if the underlying asset does as well. When profits are realized for CFD trades, the investor is subject to capital gains tax while spread betting profits are tax free as it falls within bookmakers regulations.