Spread betting is a form of investment, but as the name suggests, it’s also a form of wagering. This is because when spread betting, a trader never actually takes ownership of the market.
Whereas purchasing a stock means you own a sliver of a publicly traded company, or trading forex means taking possession of a different currency, spread betting is purely speculative. Rather than owning a stake in something that gains or loses value, you’re instead betting how that entity will perform.
To illustrate the essential difference between trading a stock and spread betting on the stock market, let’s look at an example of each investment.
First, we’ll look at trading a stock. Let’s say we buy 10 shares at £20 per share. The value of that stock then fluctuates, and over the course of the next month we decide that we’ve lost faith in it. So, after shares hit £19, we decide to sell. The return we get is £190.
Now let’s look at spread betting. Using that same stock as an example, we project that the stock is going to decline in value, and so we bet against it. This type of spread bet is known as “shorting.” The next thing we need to decide is how much we’ll bet. Let’s say we decide £2 per point. Now, let’s say the stock drops by 10 points to £19. That’s a £20 profit. However, we have to account for the spread.
A unique feature of spread betting the spread. The spread is a gap between the starting position of a market and the current position that must be crossed before a profit is achieved. To continue with our example from above, let’s say the spread is two points. This means that the first two points the stock drops, we do not profit. Once the spread has been bridged, then we begin to obtain a profit. So in this example, the total movement is 10 points, the spread is two points, and the profit is eight points. This means that on a £2-per-point wager, the profit will be £16.
Just as with stocks, spread bets can be placed on forex markets. The premise is the same – you choose one currency in the pair, then wager whether it will move up or down in relation to its partner. If the market moves the other way, you lose part of your wager, depending on the number of points it moves. If the market moves in the direction you predict, you will begin to make a profit once the spread is covered.
Spread betting can be more volatile than traditional trading options, but it really depends on the size of the wager you make. Many spread bets are placed on margin, which means the stake can be high relative to the value of the stock. Of course, this risk can be mitigated by placing smaller wagers and implementing stop losses to limit the potential damage.
On the other hand, spread betting can be extremely lucrative. Small movements can yield large profits, and the leverage available from most spread betting brokers enables big wins for relatively low investments.
Most people lose when spread betting – it is a wager after all, and there’s a reason most casinos and online bookies are profitable. This is mainly a result of the spread skewing the outcome against the trader. But some traders beat the odds and find spread betting to be a rich source of investment income. The key, as with all investments, is research and commitment to a strategy you believe in.