What is Spread Betting

What is Spread Betting?

Spread betting is considered as a derivative product in which you can trade only on the price movements of the assets offered by the financial markets and indeed you don’t buy the asset. Basically, is a speculative instrument in which you wager on an increase of prices for bullish markets or decrease of prices in bearish markets, which means you can take both, short and long positions; for every point or pip of difference between the price you entered and the price at which you are closing your position you win/lose a certain amount of money previously defined by you. This may sound a bit confusing but let’s see an example:

Example 1:

Let’s say EUR/USD pair has these prices:
Bid/Short - 1.2900
Offer/Long - 1.2910

And you are thinking the EUR/USD will go higher, then, you bet 10GBP a point/pip, entering at 1.2910. After a couple of hours the prices are like this:
Bid/Short – 1.2920
Offer/Long - 1.2930

The difference between your Entry Price (1.2910) and your Close Price (1.2920) is 10 pips (1.2920-1.2910 = .0010 or 10 pips), so you are winning 100 GBP because 10pips x 10GBP per pip = 100 GBP.

Example 2:

Now, let’s supposed that after another couple of hours, the market goes against you and you didn’t close your position and the prices are like this:
Bid/Short – 1.2890
Offer/Long - 1.2900

The difference between your Entry Price (1.2910) and your Close Price (1.2890) is 20 pips (1.2910-1.2890 = .0020 or 20 pips), so you are losing 200 GBP because 20pips x 10GBP per pip = 200 GBP.

In a third scenario, the market didn’t move and the prices remain the same, you are losing the initial spread, in this case 10 pips x 10 GBP per pip = 100 GBP.

There are some other things that needed to be considered but those depend on every broker like the trading margin, the leverage and the financing cost/swap/rollover fees; but overall this is how the spread betting works.

Comparing spread betting against classic Forex it has some pros like the Tax Free for your profits and the bigger range of markets offered...