Basic Information

• What is Spread Betting?

  Spread Betting is a tax-free* financial derivate which allows traders to speculate on the price movement of financial markets.

  With spread betting, as a trader you never actually own the underlying asset but are instead trying to predict whether your chosen market’s price will either rise or fall. If you are correct, this will result in a profit and if you are incorrect this will result in a loss.

  If you predict that the value of a product will rise, you would open a long position (Buy) alternatively; if you predict that the value of a product will fall, you would open a short position (Sell).

  *Under current tax law, spread betting is not subject to capital gains tax, however, tax laws are subject to change and depend on individual circumstances. Tax treatment may differ in a jurisdiction other than the UK.

• How does Spread Betting work?

  In Spread Betting when a trader opens a position, they specify a stake for the amount of money they are betting and each point movement will equate to that amount.

  A stake is a pre-determined amount per point movement for the product you are trading. This means for each point that the price moves positively in your favour, it will result in you gaining a multiple of your stake. On the other hand, you will lose multiples of your stake for every point that the price action moves against you.

• What is the spread?

  The spread is the difference between the buy (Ask) and the sell (Bid) price. The buy is the higher price shown and the sell is the lower price.

  When entering a trade, and for example you want to go long, you will Buy using the Ask price quoted, and to exit the trade you will Sell at the Bid price quoted. Tight spreads are important because the narrower the spread, the less the price needs to move in your favour before you start making a profit, or if the price moves against you, a loss.

• What is holding cost?

  Due to the interest rate obligations on the relevant instruments, any positions still open at the end of the trading day may be subject to a charge called a ‘holding cost’ (Or swap fee).

  The cost will either be positive or negative depending on the direction of your position and the applicable holding rate.

  Holding cost information is available via the MetaTrader 4 platform by right clicking on an instrument in the market watch ,and selecting the ‘Specification’.

• What is margin or leverage?

  Spread Betting is a leveraged product which means traders are only required to deposit a small percentage of the total cost that would be needed if they were to purchase the equivalent product in the physical market. This is called trading on margin and allows you to magnify your returns; but beware as you can also magnify your losses. This is because the trade is based on the full value of the position, which also means you can lose more than your initially deposited amount.

• Advantages of Spread Betting

  - You never own the underlying asset and therefore do not have to pay any stamp duty

  - You can trade on worldwide instruments including Indices, Forex and Commodities

  - You do not have to pay capital gains tax but you cannot use losses to offset tax liabilities

  - Leveraged product meaning you can open a large bet with a much smaller deposit

  - Access to 24-hour forex markets

  - There are no separate commission charges to pay on spread bets, compared to trading on physical markets

• Understanding what can affect price movements

  Daily major economic news and events can have a significant impact on the market. This data typically gives an insight into a country’s economic or political health. It indicates what is going on in a particular country and usually dictates price movement. These figures are seen as statistical evidence to back up speculation on whether or not an economy is doing well.

  There are many statistics which affect markets in different ways. For example, interest rates, Gross Domestic Product (GDP), retail sales, industrial production, inflation, public debt, economic and political stability all play a part in influencing market movements. Therefore, traders are often kept up to date with daily news in order to anticipate the effect an announcement will cause on the market. It allows investors to outline where it is most suitable to invest, if a country is going through a lot of political turmoil for example, investors will deviate from investing in such a country as their capital will be at greater risk.

• Example of Spread Bets

  Going long – Outcome A: winning trade

  In this example, the UK 100 is currently priced at 7570.8 / 7571.8 (Sell price/ Buy price). You believe the price of the UK 100 will rise, so you decide to take a long trade at £2 per point.

  Over the next hour the price of the UK 100 is 7610.4 / 7611.4, your prediction was correct and you decide to close the position.

  The market has moved a total of 38.6 points (7610.4 / 7571.8) in your favour. This amount of points will need to be multiplied by the stake size (38.6 x £2) giving the client a profit of £77.20.

  Going long – Outcome B: losing trade

  Unfortunately, in this instance the price moves against you and has lowered to 7530.5 / 7531.5. Your prediction was incorrect and you decide to close the position.

  The market has moved 41.3 points against you, meaning you would have incurred a £82.60 loss based on the £2 stake size you initially placed (41.3 x £2 = £82.60).

  Going short – Outcome C: winning trade

  In this example, the GBP/USD is currently priced at 1.30900. You believe the price will fall and so decide to take a short trade at £5 per point.

  Over the next few hours the price has fallen to 1.30650. You decide to close the trade earning you 25 pips. In this instance, you have made £125 (25 x £5).

• Risks of Spread betting

  When trading, please be aware that there are risks associated with Spread Betting. You can lose more than your initial deposit. You are using leverage meaning you are trading with more than your initial margin. This can amplify profits but can conversely amplify losses. You should make yourself fully aware of all risks before being involved in trading as your capital can be at risk.