New to Which Spreads and Spread Betting
Which Spreads is here to provide you with an all round guide to spread betting in the financial and sports markets. We showcase the best and most reputable online traders including SpreadEx and City Index, you can see all the various features and offers available including free trades, and risk free trials.
New to Spread Betting?
Simply spread betting is wagering on the outcome of the event where the financial gain or loss comes from the accuracy of the wager as opposed to simply a win/loose or higher/lower in fixed odds betting and conventional share trading. A spread is a range of outcomes, and the bet is whether the outcome will be above or below the spread. In the UK spread betting is seeing increased growth with over a million traders. Importantly to note is Spread betting carries a high level of risk, with potential losses or gains far in excess of the original money wagered. In the UK, spread betting is regulated by the Financial Services Authority rather than the Gambling Commission.
Background to Spread Betting
Spread betting was invented by Charles K. McNeil, he was a mathematics teacher from Connecticut who became a bookmaker in the 1940s in Chicago. The idea became popular in the United Kingdom from the 1980s. Usually wagers that the difference between the scores of two teams or stock prices will be less than or greater than the value specified by the bookmaker.
Large fortunes have been made and lost from financial spread betting. Vince Stanzione is a well known spread bettor and made well over £2 million spread betting commodities. A not so successful spread bet was placed by Mike Ashley on the shares of HBOS, which is reported to have lost £300 million. Ashley was long expecting them to go up when in fact they continued to drop before being taken over by Lloyds TSB.
According to a recent Times article there are approximately 30,000 spread betting accounts opened in 2008 and in the largest study of gambling in the UK by the Gambling Commission found serious problems developed in almost 15% of spread betters compared with 1% on normal gambling. A Cass Business School reports also found that only 1 in 5 spread betting gamblers ended up winning.
Financial Spread Betting
The largest part of the official UK market is financial spread betting, the largest spread betting companies make most of their revenues from the financial markets not sports. Financial spread betting in the United Kingdom closely resembles the futures and options markets, the major differences being:
- The ‘charge’ occurs through a wider bid-offer spread.
- Spread betting has a different tax regime compared with securities and futures exchanges.
- Spread betting is more flexible since it is not limited to exchange hours or definitions, can create new instruments relatively easily (i.e. individual stock futures), and may have guaranteed stop losses.
- The trading is off-exchange, as the contract exists directly between the market-making company and the client, rather than exchange-cleared, it is subject to a lower level of regulation although the spread betting companies themselves are some of the most regulated entities in the City of London.
- Financial spread betting is a way to speculate on financial markets in the same way as trading a number of derivatives. In particular the financial derivative Contract for difference (CFD) which in many ways mirrors the spread bet. In fact a number of financial derivate trading companies offer both financial spread bets and CFDs in parallel using the same trading platform.
- Unlike fixed-odds betting, the amount won or lost can be unlimited as there is no single stake to limit any loss. However, it is usually possible to negotiate limits with the bookmaker:
- A ‘stop loss’ or ‘stop’ will automatically close the bet if the spread moves against the gambler by a specified amount.
- A ‘stop win’, ‘limit’ or ‘take profit’ will close the bet when the spread moves in a gambler’s favour by a specified amount.
Spread betting has moved outside the ambit of sport and financial markets (that is, those dealing solely with share, bonds and derivatives), to cover a wide range of markets, such as house prices. In a falling stock market, financial spread betting can also be used by investors as a means of hedging against predicted losses in a portfolio of shares.
A Financial spread betting example:
If Lloyds TSB is trading on the stock market at 410p bid, and 411p offer. A spread-betting company is also offering 410-411p (we use cash bets with no definite expiry).
If you think the share price is going to go up, you may bet £10 a point (£10 per penny the shares moves) at 411p. We use the offer price since you are ‘buying’ the share (betting on its increase). Note that the total loss (if LloydsTSB went to 0p) could be up to £4110, so this is as risky as buying 1000 of the shares normally.
If a bet goes overnight, the bettor is charged a financing cost (or receives it, if the bettor is shorting the stock). This might be set at LIBOR ( London Interbank Offered Rate) plus a certain percentage, usually around 2/3%.
In this example, if Lloyds TSB are trading at 411p, then for every day the bet is kept open you are charged (taking finance cost to be 7%, ((411p x 10) * 7% / 365 ) = £0.78821 (or 78.8p)).
On top of this, the trader needs an amount (or margin) in the spread betting account to cover the bet. Usually this is either 5 or 10% of the total exposure taken on but can go up to 100% on illiquid stocks. In this case £4110 * 0.1 or 0.05 = £411.00 or £205.50
If at the end of the bet Lloyds TSB traded at 400-401p, that needs to be covered £4110 – £400*10 (£4000) = £110 difference by putting extra deposit (or margin) into the account.
The trader will usually receive all the dividends and other corporate adjustments in the financing charge each night. For example, suppose Lloyds TSB goes ex-dividend with dividend of 23.5p. The bettor will receive that amount.