Spread betting and day trading using spread bets is a high-risk, tax-efficient form of market speculation. This page will break down everything you need to get started on intraday spreading betting and online trading – it will deal with trading platforms, the how-tos of trade and strategies.
What is Spread Betting?
Spread betting is a fairly straightforward trading method which gives you access to a number of global markets, all through a single broker. You may start spread betting on the following:
- Commodities (gold, silver, aluminium)
- Cryptos (bitcoin, ethereum, ripple, litecoin)
When you’re spread betting you never actually own an asset. Rather, you actually shadow the underlying asset that you sell. Investors bet about whether the price of the security will rise or fall, using the prices the broker puts out.
Spread betting reports in the United Kingdom also mark this form of trading as just gambling.
That isn’t entirely fair though. In the UK, this is a strictly regulated instrument of the Financial Conduct Authority (FCA).
Switched on spreading betters, and traders would perfect their skills and trade with a similar mindset to those day trading stocks, futures and other conventional instruments.
How Does it Work?
You trade, rather than just placing a bet. Then you must keep your spot until the right moment occurs once the bet is live.
Spread betting firms will provide you with a forecast (spread) of where they think a certain share or index will be closed at a specific time. You must then exchange (bet) on the estimate’s accuracy.
So, you could ‘buy’ on the price if you think the prediction is too low. Additionally, you can ‘sell’ if you think the spread is too big.
Spread Betting Example
Let’s presume Waitrose opened the day at 325p and that you want to trade in their shares on short-term movements. You could see a quote from a broker 325p to 326p (the spread). You think the share should finish higher, however, so you purchase at 326p at £100 per point transfer.
If Waitrose closes at 330p at the end of the day, that’s four points more than the price for the company. You will be winning £400, instead. On the other side you would have to cough up £200 if Waitrose ended the day two points below the purchase price at 324p.
Advantages of Spread Betting
Why are growing numbers of people trying to make a spread bet living? For a variety of very good reasons. These are all outlined below.
- Tax-free – All winnings from distributing day trading spread betting are tax-free. While speculation about market fluctuations by buying and selling shares can open you up to potentially substantial tax liabilities, spread betting is free of all taxes, including capital gains and stamp duty.
- Minimum capital needed – You need much less capital for a big outlay than you do to trade conventional instruments. Going back to the example above on Waitrose, you will need tens of thousands of pounds to get the same exposure.
- Regulation – Spread betting in many countries is limited, including France, Germany and the United Kingdom. It gives you certain leeway, and protects your money from a number of circumstances. Regulation keeps you away from spread betting scams.
- Access – Spread betting provides you with access to many global markets. From stocks and coins to interest rates and equities. You do have the freedom to trade around 24 hours a day, so you can match the spread betting to your everyday rhythm.
- Commission-free – Day trading costs will pile up quickly if you’re doing a lot of trades. Spread betting, however, typically comes with no commission fees. Instead the distribution requires costs.
- Leverage – Several brokers are offering leveraged trading. That allows you to borrow capital to increase the size of your position. That could increase your profit potential significantly. The downside is that losses can be magnified too. Therefore many find spread betting without leverage much safer.
- Arbitrage or Hedging – Combining spread bets may result in ‘arbing’ opportunities, or allowing traders to ‘hedge’ other derivative holdings.
Spread betting full-time as a career could well be worth your while if you like the following:
- You want to get access to a range of asset classes.
- It’s critical that you have tax-free income.
- You want to be able to trade on both rising and falling markets.
- It is necessary for you to stick to the sterling trade, even if you are speculating on foreign markets.
- On share offers you would like to benefit from reduced sizes, without having to pay a minimum fee.
Risks of Spread Betting
Given the long list of spread betting pros, you should be mindful of some cons, too:
- Potential for loss – If you don’t properly handle the risks and positions you can experience substantial losses. These losses can exceed your initial investment if you are trading on the margin. No one wants their broker to receive a margin call for additional cash. Brokers will have to regularly disclose ‘chance of loss’ figures so customers are fully aware of the risks.
- Addiction – You will easily find yourself in a spread betting nightmare if you overtrade. When that does happen, instead of selling, you’re just gambling.
- Poor bid-offer spreads – Companies make up the difference with high bid-offer spreads that they lose by zero commission fees. That’s why some of the best advice is to start shopping around and finding a reliable broker.
- Legality – Is spreading betting in your country certainly legal? For example, it is legal in Canada, while completely illegal in the United States.
As tempting as it is, spread betting is not always an easy way to make a living. Thus, the most popular spread betting winners are those who go in with their eyes open to the risks.
Spread Betting vs Share Trading
Many people correctly question why you’d go for the more conventional share trading to spread betting. You purchase a specific amount of shares in a company through the share trading, e.g. Apple, and sell them to make a profit in the expectation that they have increased in value.
You can only make a profit though if the price of the share increases.
You can take positions on any price change in a company’s shares with spread betting. A spread bet trade may be done on a plummeting share price.
It’s called ‘going short,’ or just a ‘short.’ You simply do not have the same option with conventional share dealing.
In fact, you do not own the real spread betting shares (they are a derivative). This means that sometimes, much less capital is needed.
For beginners and others with minimal resources, this makes spread betting perfect. So, if you’re contemplating spread betting vs stock broking, binary options, futures trading, or long-term investing, sometimes you’ll find the former is an enticing proposition.
Spread Betting Terminology
Below is a glossary of spread betting, where you can find a rundown of all the important jargon.
- Bet size – This defines how much you are going to gain or lose in your market price at any point of movement. Often known as size of stake.
- Spread / Bid / Offer spread – The financial spread for a particular bet is the difference between the buy and sell price. The spread is usually based on data from the live market.
- Managed bet for risk – That is when you limit your maximum loss by a guaranteed stop. For example, this could be triggered by an important news event. This will keep you from enduring a loss far greater than expected. Normally you will pay a premium to place a regulated bet on the risk.
- Down Bet – This is when you position a spread bet with the expectation that the price of a financial asset will fall. For instance, if you believe the price of aluminum will collapse, you will position a sell bet at the price of the offer.
- Up bet – If you think the price is going to rise, you’ll put an up bet on a market. For instance, if you think the FTSE price will rise you will place an up bet on the UK FTSE 100 or 250 market. You must buy at the price of the ‘bid’ which is the higher price of the quoted range.
- Expiration – The expiry date is the closure of the bet. Your bets will be paid at the respective closing price and agreed time upon expiration.
- NMS (Normal Market Size) – Today it is more generally referred to as Exchange Market Size and reflects the exchange-specified quantity of shares that a spread betting market maker is required to quote a two on, in a certain underlying market.
- Slippage – This represents the difference between the stop order level and the actual price it will be executed. During times of high volatility slippage can occur. A guaranteed stop is an efficient way of preventing slippage, as described above.
- Period – Some spread bets are going to expire
If you start spreading betting for a living you may need to familiarize yourself with all of the above words.
How To Start Spread Betting
You need to follow the steps mentioned below to get set up and start trading before you can start cashing in those big payouts.
Choose A Broker
Your broker is going to be your market portal by the trading account. They’ll make your trades simpler and their website is where you’ll spend several hours a day. What should you look for though, with so many brokers offering a similar service?
- Price – How are their spreads efficient relative to others? Several firms specialize in some low cost markets. They will instead, however, sell other markets at less favorable prices, just to ensure that they have a presence. Specific spread betting forex brokers will give you a better deal than a ‘jack of all trades’ company. So, do your research, and test if you’re going to get the lowest spreads in the markets you want.
- Requirements – Ensure that your margin, minimum deposit criteria and position size criteria are in line with your financial condition. When you lose the first few trades you don’t want to pick a broker whose minimum criteria will quickly see you out of the market. For example, stocks sometimes need a margin of 10 per cent. So if you’re a high volume trader you’re going to need considerable money.
- Apps – Is the company offering all the stops that your plan demands? Can they give guaranteed stops and restraint orders, for example?
- Markets – Is the spread betting business offering the markets you want? Exotic currency pairs for example may be a concern.
- Customer support – If you experience any issues, can you get prompt assistance? Would it be over the phone or online chat? Many companies provide assistance 24/7, in several languages. So, first test the ratings. You don’t want to be left in the dark for hours wasting money on their website because of a technological glitch.
- Control – Make sure they are handled properly. They are legally obligated to safeguard your money.
- Tools & Resources – Do you have access to trading software and charts that are free and easy to use, such as volume indicators? It will also prove useful for material analysis and news feeds. For example, some spread betting brokers offer trading on MT4 which is reliable and packed with useful features.
- Pay Rewards – Will the broker offer incentives for deposit and account opening? Should they give any other deals, including reduced cost of ownership? Any rewards worth considering are welcome.
Place Your Trade
When you have set up and funded your spread betting account, putting a offer is fairly straightforward. You will have to do as follows:
- Choose the market – Dow Jones, Dax 30, Vix, S&P 500, Brent Crude Oil, Nasdaq, penny stocks, forex, options, etc. For novices, the best spread betting platforms offer a variety of markets for you to try your hand at.
- Decide on the course of price – Want to purchase or sell?
- Choose your size of position – This is your stake per point, or size of the bet. Make sure it works into the method of your money management. You don’t want to lose any unnecessary capital per trade.
- Decide your price rates – This is your goal for entry point, benefit target and stop-loss. All of this will help you remain inside your plan and escape the emotions that lead you astray.
You may be the smartest person in any room but without an efficient trading strategy, it’s not worth spread betting. Fund your account without a well-planned strategy and the account will be empty soon.
So, doesn’t matter if you use scalping or the moving averages, what makes a good strategy?
Charts & Patterns
When you look at historical data to forecast possible trends, then you will definitely use charts and patterns. Conduct a detailed broker analysis to ensure that their charting methods meet your requirements. Today most sites provide all of the traditional bar, line, and candlestick graphs, plus a variety of signals.
Many of the more advanced platform products will give you additional graphs and functionality to help you spot smarter trends. You will have that all-important edge over the rest of the market if you can create charts that paint a clear picture of where the price has been and where it is going.
If you are not prone to technical analytics strategies like trend reversal, breakout trading, and momentum techniques, then you can always buy and sell based on news events. Big business moves are always the trigger for a spread betting round.
Let’s assume, Facebook is paying a dividend which will expire later. Many people switched on will track the annual general meetings (AGM) of Facebook to keep ahead of any possible announcements of dividends.
Let us assume, for example, that Facebook stock traded at £100, and it announced a £1 dividend. The share price could then continue to rise to dividend level. At around £101 in this case. Before this announcement, you’d take a stand to benefit from the price change. You would gain £1,000 * £1 * £10 = £10,000 if you took a position of 1,000 shares at £100, with £10 per point move.
Entry & Exit Points
A successful spread betting strategy balances rates of profit-and-loss. Let’s assume that Ralph, a trader, wins four out of five spread bets with an average 80 percent win rate.
Ralph also has Charles, a friend and fellow trader, who wins two out of five spread bets, giving him a 40 per cent win rate. Ralph may appear to be the most effective trader but this is not always the case. Using advantageous benefit rates to structure your bets will seriously improve your results.
Let’s presume Ralph took the position of having £10 for every winning bet and losing £40 for every losing bet. But with a win rate of 80 percent, Ralph’s earnings are cleared by the £40 that he loses with only one wrong bet (0.8 * £10 – £0.2 * £40 = £0).
Whereas Charles, on any good bet, takes £25 and loses only £5 per bet lost. So Charles would only make a £7 profit (0.4 * £25 – 0.6 * £5), even with his 40 percent win rate. Charles still ends up the winning trader despite losing 60 per cent of the time.
And a successful plan requires more than a high win percentage. It needs a framework that matches your profit-and-loss rates against your overall win rate in order to remain consistently in the black.
Spread Betting Tips
Never Stop Learning
As Paul Tudor Jones pointed out, the secret to being successful from a trading perspective is to have an indefatigable and unquenchable thirst for information and knowledge. You need to change if you want to stay ahead. Fortunately there are a multitude of distributed betting services out there. To name a few:
- Books & Ebooks
- Videos & tutorials
- Blogs & forums
- Online instruction guides
- Magazines, webinars & online courses
If you’re spread betting, or a CFD day trader, all of this will help feed you with the knowledge you need to start making a profit. It is those who do not seek support and advice, who end up with poor returns because they lack the spread betting experience.
Follow the news – this is crucial. Markets are evolving continuously in reaction to the news events. That’s why delivery of live news updates is a must on the best spread betting platforms. Even resourced news can be found dedicated to specific markets. Here are some of the best sources available:
- Yahoo Finance
- Google Finance
- Business Insider
A spread betting practice test account is the perfect way to handle the basics. Mistakes can be detected, the approach refined and the trading climate familiarized.
It’s also a perfect way to put the broker and network to the test first. Many of the major brokers now sell this service at no discount. Your account is funded with simulated money so til you’re confident you don’t have to gamble real cash. There is nothing to lose when trying out a trial account.
If you want to join George Soros’ likes in the famous trading space, you’ll need an easy way to look back and evaluate your past success and what you’ve been trading.
Holding a spread betting trading journal is a great place to get started. You should keep your report on an Excel spreadsheet and add all the details you need:
- Position size
- Entry point & exit
- Profit & loss
- Reason for making the trade
Take a note of this and you’ll find areas of improvement and strategy flaws much easier to identify. Holding a diary like this is one of the first pieces of advice you’ll get in spread betting lessons.
Spread betting millionaires and pros should have a system of risk management which they diligently adhere to. Without such a plan reaching the trading arena is the first step towards a series of financial disasters.
Therefore, several recommend that you never gamble more than 2 percent of your account balance on a single transaction. When your balance is at £20,000 right now, you can never gamble more than £400 on a single deal. This will stop you from losing more than you can handle, and in the long run, hold you swinging.
Technology has introduced a world of useful instruments, including automated trading. Once an effective strategy and the correct algorithm has been developed, you can use robots to position your bets according to pre-determined criteria. This will allow you to position a much higher trading volume across a variety of markets.
You can even get automated tax software that keeps a detailed record of all of your trades, enabling you to easily file your tax return at year-end.
Those algorithms are sophisticated and easy to set up. Most importantly, they will save you considerable time so you can focus your efforts on making a profit.
It’s critical that you factor tax rules in your financial forecast for your country. Of example, in the United Kingdom, HMRC considers spread betting tax-free. However, if spread betting is your sole earning in 2017, you might find that many countries consider it taxable.
If you spread bet as a non-UK citizen, note regulations differ from Australia, India, Malaysia, Ireland, Singapore, Nigeria, Germany, Dubai, Greece and New Zealand to Germany.
So do your homework, and find out if your earnings will be paid, and if so, how much. Does it fall under a tax system on capital gains, corporate income tax or something else?
It’s also worth mentioning that tax avoidance can have serious consequences. The tax rules of some systems impose heavy fines, while others might see you facing jail time.
Spread betting has, perhaps undeservedly, an alarming tag. However, there are many out there, despite some bad press, that have generated life-changing profits with this financial instrument. If you’re looking for inspiration, read on some of the great wins below.
One whale shorted Facebook in May 2012 when it made its New York Anticlimactic Debut. The person claimed that on May 21st the stock would fall, and they were right. Shares were down $4. An online calculator shows the person concerned made more than $8,000 a point, making them a total income of almost $3 million.
Using the IG index, in just 12 months, some heavy hitters cottoned on to a dramatic price decline from $1.45 to $1.25. The 2000 point change saw a few individuals selling a point at $25,000. That’s a $50-million net income.
United Kingdom Interest Rates
One switched on person won £110,000 in just 10 seconds, when he bet the Bank of England in November 2008 would cut interest rates by more than 1 per cent. The stock has soared to 96.31, netting him 51 times his stake of £2120.
There are plenty of spread betting kings out there, making a really good living out there. But to answer the question on the lips of a lot of people, spread betting – how much can you do? Several people are millionaires as seen in the examples above.
As a spread day betting trader, your aim is to add some degree of predictability to the unpredictable and uncertain world in which we live. Every day, you’ll put multiple spread bets, concentrating on tight spreads and changing markets. Yet note, spread betting is not easy money and income.
There are large numbers of losers in the industry who can testify to that. Nonetheless, if you use the above tools and opt for the right broker and network, you might take the first steps to becoming a millionaire spread betting in the near future.