what is spread betting 
spread betting refers to speculating on the direction of a financial market without actually owning the underlying security it involves placing a bet on the price movement of a security a spread betting company quotes two prices the bid and ask price also called the spread and investors bet whether the price of the underlying security will be lower than the bid or higher than the ask the spread bettor does not actually own the underlying security in spread betting they simply speculate on its price movement spread betting should not be confused with spread trading which involves taking offsetting positions in two or more different securities and profiting if the difference in price between the securities widens or narrows over time understanding spread bettingspread betting lets investors speculate on the price movement of various financial instruments such as stocks forex commodities currencies cryptocurrencies and fixed income securities in other words an investor makes a bet based on whether they think the market will rise or fall from the time their bet is accepted they also get to choose how much they want to risk on their bet it is promoted as a tax free commission free activity that allows investors to profit from either bull or bear markets spread betting is a leveraged product which means investors only need to deposit a small percentage of the position s value for example if the value of a position is 50 000 and the margin requirement is 10 a deposit of just 5 000 is required this magnifies both gains and losses which means investors can lose more than their initial investment spread betting is not available to residents of the united states due to regulatory and legal limitations managing risk in spread bettingdespite the risk that comes with the use of high leverage spread betting offers effective tools to limit losses risk can also be mitigated by the use of arbitrage betting two ways simultaneously spread betting examplelet s assume that the price of abc stock is 201 50 and a spread betting company with a fixed spread is quoting the bid ask at 200 203 for investors to transact on it the investor is bearish and believes that abc is going to fall below 200 so they hit the bid to sell at 200 they decide to bet 20 for every point the stock falls below their transacted price of 200 if abc falls to where the bid ask is 185 188 the investor can close their trade with a profit of 200 188 20 240 if the price rises to 212 215 and they choose to close their trade then they will lose 200 215 20 300 the spread betting firm requires a 20 margin which means the investor needs to deposit 20 of the value of the position at its inception 200 20 20 800 into their account to cover the bet the position value is derived by multiplying the bet size by the stock s bid price 20 x 200 4 000 spread betting benefitsinvestors have the ability to bet on both rising and falling prices if an investor is trading physical shares they have to borrow the stock they intend to short sell which can be time consuming and costly spread betting makes short selling as easy as buying spread betting companies make money through the spread they offer there is no separate commission charge which makes it easier for investors to monitor trading costs and work out their position size spread betting is considered gambling in some tax jurisdictions and subsequently any realized gains may be taxable as winnings and not capital gains or income investors who exercise spread betting should keep records and seek the advice of an accountant before completing their taxes because taxation on winnings in some countries is far less than that on capital gains or trading income spread betting can be quite tax efficient depending on one s location limitations of spread bettinginvestors who don t understand leverage can take positions that are too large for their account which can result in margin calls investors should risk no more than 2 of their investment capital deposit on any one trade and always be aware of the position value of the bet they intend to open during periods of volatility spread betting firms may widen their spreads this can trigger stop loss orders and increase trading costs investors should be wary about placing orders immediately before company earnings announcements and economic reports spread betting vs cfdsmany spread betting platforms will also offer trading in contracts for difference cfds which are a similar type of contract cfds are derivative contracts where traders can bet on short term price moves there is no delivery of physical goods or securities with cfds but the contract itself has transferrable value while it is in force the cfd is thus a tradable security established between a client and the broker who are exchanging the difference in the initial price of the trade and its value when the trade is unwound or reversed although cfds allow investors to trade the price movements of futures they are not futures contracts by themselves cfds do not have expiration dates containing preset prices but trade like other securities with buy and sell prices spread bets on the other hand do have fixed expiration dates when the bet is first placed cfd trading also requires that commissions and transaction fees be paid up front to the provider in contrast spread betting companies do not take fees or commissions 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 the profit of the closing position minus the opening position and fees profits for spread bets will be the change in basis points multiplied by the dollar amount negotiated in the initial bet both cfds and spread bets are subject to dividend payouts assuming a long position contract while there is no direct ownership of the asset a provider and spread betting company will 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 usually tax free 