Between 54-87% of retail CFD accounts lose money. Based on 69 brokers who display this data.
Spread betting revolutionised speculation on the financial markets. This unique form of trading facilitates taking a directional risk in the financial markets for a wide audience previously unable to participate in major market moves.
Although the bucket shops of the early 1900s started the phenomenon, the modern concept of spread betting began in the UK in the mid-1970s when trading gold for speculative purposes was illegal.
IG Markets‘ founder Stuart Wheeler had the idea of letting people trade gold as an index and in 1975, the International Gold or IG Index began trading. It was the forerunner of all the current spread betting bookmakers.
Today, speculators have a variety of spread betting platforms and brokers to choose from and trade the following markets: bonds, commodities, cryptocurrencies, ETFs, equities, forex currency pairs, and precious metals. Spread bets are even placed on futures and options markets, as well as on the outcome of events like sports matches and political elections.
The concept of spread betting consists of having an opinion on the outcome of an event, such as the direction of a financial market, and placing a bet or stake that may benefit from that outcome with a broker. As an example, spread betting forex currency pairs is speculating on the future direction of specific currency pairs like the EUR/USD.
The spread bettor takes one side of a two-sided market, they either sell on the bid side (going short), or they buy on the offer side (going long). The spread bettor either profits if the result favours their bet or loses if the outcome goes against their bet.
The amount won or lost is calculated by taking the closeout or settlement price minus the opening price, dividing by the point size, and then multiplying the result by the stake amount. Click here to see a spread betting example.
A key advantage to financial spread betting is the transaction gets treated as a bet in the UK, so no special spread betting tax UK clients need to worry about ever gets imposed. This means no Capital Gains Tax, Income Tax or Stamp Duty gets charged to diminish betting profits, if any. Conversely, losses are not tax deductible.
* Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK
Furthermore, spread betting is generally only permitted in countries that have legalised gambling, such as the UK for example. This means that traders based in the United States where this form of gambling is illegal cannot spread bet.
Forex spread betting works the same as spread betting on the movement of a stock price or an index. Also, when spread betting on currency pairs, a rolling spot quote means the bet does not expire but instead gets rolled over for another session, which may result in a small rollover charge.
For example, a spread betting broker might quote a bid/offer of 1.1450/1.1451 for the EUR/USD currency pair.
A bet or stake of £5.00 for every pip, or $0.0001, that the Euro increases above 1.1451 could be made that would pay off with the EUR/USD rate anywhere above 1.1451 upon closeout.
If the currency pair’s exchange rate declines, the bettor would have to pay £5.00 for every pip the EUR/USD pair trades below 1.1451.
Accordingly, if the exchange rate rises as anticipated to end up at 1.1491/1.1492 when the bet is closed out, the gain would be:
(1.1491-1.1451)/0.0001 x £5.00 = + £200.00.
Conversely, if the exchange rate falls unexpectedly to end up at 1.1431/1.1432 upon closeout, the loss would be:
(1.1431-1.1451)/0.0001 x £5.00 = – £100.00
One of the most important factors when selecting a spread betting broker consists of the upfront costs of placing a trade that depends on the “spread”, which is the difference between the bid (sell) and offer (buy) prices of the underlying asset quoted.
Brokers make their money from the difference in the bid/offer spread, so they generally charge no commission and the bettor pays the spread to access the particular market that they are speculating in. For this reason, speculators would typically be better off choosing a broker with tight, competitive dealing spreads.
As concrete examples of spreads at major brokers like IG and CityIndex, the FTSE 100 daily spread is one point, while the Wall Street daily spread is 1.6 points, although IG offers variable spreads while CityIndex offers fixed spreads. Both require putting up a five per cent margin to speculate on those indices, and the minimum bet amount or stake in either stock market index is £0.50/point.
As an example, the two-way quote to spread bet on the FTSE 100 could be 7,103.84/7,105.44, so if a trader took a minimum stake of £0.50/point anticipating the market rising, they would get into that bet at the buy price of 7,105.44. The FTSE 100 would have to increase by 1.6 points to break even (excluding any other fees), as it would be sold at the bid price. For example, if it increased by exactly 1.6 points, the bid and offer price would be 7,105.44/7,107.04 and the trade could exit the position at the same price they bought in for.
Scalping, which is a viable very short-term trading strategy relies on tight spreads. Because of this reason, scalping is somewhat unsuitable for a spread betting account due to the wider spreads seen versus a zero spread or ECN forex trading account, so finding a spread betting broker for scalping can be challenging.
The margin requirement for a spread bet consists of the amount the spread betting broker requires a speculator to deposit to establish a spread bet, which generally represents a fraction of the value of the underlying asset. Margin requirements for spread betting vary among the different brokers and generally depend on the underlying assets that are traded.
Margin gets calculated as a percentage of the value of the underlying asset and can range from 3% to 50% depending on the liquidity and volatility in that particular market.
To determine the margin required to open a bet, multiply the notional amount of the trade, which is the stake multiplied by the asset’s price, by the relevant margin percentage.
For instance, if Vodafone Group PLC’s margin requirement was 20%, a trader wants to place a £1 per point spread bet, and the current price of Vodafone is 150p, the notional amount of the trade is 150 * £1 = £150. So, the required minimum deposit to open the trade would be 20% of £150 which is £30. However, a trader would need to deposit more than the minimum to avoid margin calls which would close the trade if the price moves against them.
For long-term traders, the interest charge becomes an important factor to take into account. If you take advantage of the leverages offered by a broker, you are borrowing capital for trading from the brokerage firms.
Interest is charged on the borrowed funds and can accumulate rapidly. The interest can either work in your favour or cut into your profits depending on the asset and position taken. Be sure to check the broker’s interest policy. For example, IG charge 2.5% plus the interbank rate for long positions held overnight.
Imaged sourced from IG.com 18/11/2018.
Regulation is one of the most important factors to consider when choosing a spread betting broker. Security of a trader’s funds should place near the top of their list of priorities when choosing a spread betting broker, and good regulation helps assure this.
Reputable spread betting brokers should be regulated in the UK, by the FCA or Financial Conduct Authority. Brokers regulated by the FCA offers a certain degree of protection for each client’s funds. Most importantly, the FCA requires all spread betting firms to maintain their client’s funds in accounts that are segregated from the funds of the company. This prevents brokers from withdrawing client funds or using them for operational expenses.
While the FCA allows spread betting brokers to advise clients on the most suitable type of spread bet, the regulator prohibits spread betting firms to give clients any financial advice. This means that brokers cannot recommend trades, when to liquidate them or when to take profits on their trade. Be cautious if a firm is offering this kind of advice as it could be going against the FCA regulatory guidelines.
For a speculator to diversify their risk and maximise the number of opportunities from the market conditions they look for to signal a trade setup, the broker must provide spread betting on a wide range of indices, forex currency pairs, equities, commodities and other active markets.
A further consideration when choosing a broker for spread betting consists of the expertise the broker exhibits in executing transactions in each particular market. In general, the more markets a broker offers access to has substantial advantages to a speculator, largely because they only need a single spread betting account instead of many accounts held at different brokers to vary their trading activities among diverse markets.
When spread betting on foreign currency denominated assets, there should be no currency risk when liquidating the position. In other words, if a spread bet was made in the UK, and the GBP/USD rate declined or appreciated, the return or loss on the spread bet should still reflect the percentage gain or loss seen on the underlying asset or currency pair and be paid out in that percentage in Pounds Sterling.
For example, if a UK based speculator places a £0.50 per $1 move bet on a U.S. stock worth $10 per share, and the market then moves up to $15 per share upon closeout.
The return on the bet should be 50 percent regardless of the Pound Sterling/U.S. Dollar exchange rate. The spread bet would therefore pay out £0.50 per $1 point move or £2.50 for a $5 move and without translating that $5 move from U.S. Dollars back into Sterling. Similarly, if the market moved down to $5 per share, the loss incurred is -50 percent or -£2.50.
Customer service in spread betting is an important factor just as it is in other types of trading. The broker should be available at all times. This is important when the trader needs to quickly withdraw from certain positions or if the platform breaks down during trading hours.
Some brokers may only offer email or phone support where others like City Index will offer email, phone and live chat support via their website.
Imaged sourced from cityindex.co.uk 18/11/2018.
Daily spreads for the FTSE 100 and Wall Street indices, as well as rolling spreads for the GBP/USD and EUR/USD currency pairs, are commonly used for comparing spreads among different brokers. Although traders should see what spread betting broker best suits their particular situation and offers the best spreads for their preferred asset classes.
The number one UK spread betting broker in terms of experience and overall popularity according to the 2016 Invest Trends report is the original spread betting broker — IG Spread Betting. You can compare the features of their award-winning proprietary web-based, mobile and tablet betting platforms here. This broker has the most active financial spread betting UK and foreign accounts, according to Investment Trends’ UK Leveraged Trading Report for 2018 cited in their annual report, and provides access to over 15,000 markets.
Another UK broker, City Index’ Spread Betting Account has similar dealing spreads to IG, offers access to over 12,000 markets, and was voted the UK’s Best Spread Betting Service by Shares Award in 2017.
City Index also offers several platforms including a downloadable AT Pro platform, Web Trader and mobile trading apps. City Index received the award for the best spread betting platform in 2017 according to ADVFN, and the best spread betting app for mobile devices for 2018 according to OPWA.
City Index also provides support for using the popular MetaTrader 4 or MT4 online dealing platform for spread betting, which can be used to run and create Expert Advisors that trade automatically, as well as custom indicators.
Each of the aforementioned top spread betting brokers have different minimum stakes and daily spreads on the FTSE 100 and Wall Street instruments, as well as offering forex-related spreads, so visit their websites for additional information.
Can the broker fix any trading errors that occur?
Admittedly, it’s usually hard to determine with a high degree of certainty whether a spread betting brokerage firm will go belly up. But there are certain precautions you can take. You can check whether the firm is well capitalised and financially sound.
Any company can experience trading errors both from dealers and clients. However, the broker should be able to sort out such problems quickly and efficiently. This might give a slight edge over public companies compared to private ones because they are required by law to make their financial accounts public on a regular basis, for example, you can view the annual returns of publicly listed companies like Plus500 and IG.
Imaged sourced from plus500.co.uk 18/11/2018.
Finding the best broker among the many spread betting brokers and platforms available to suit your particular needs is an important step.
One should research a number of important factors when selecting a broker, such as spreads, margin requirements, regulatory status, reputation, account types, and tradeable assets.
The spread betting companies in the list above accept UK clients, are regulated in the UK and offer a good range of financial products to bet on, click here to see the list.
Between 54-87% of retail CFD accounts lose money. Based on 69 brokers who display this data.