Sterling Savvy

>

Spread Betting: What Is It & How Does It Work?

Tobi Opeyemi Amure
Reviewed by:
What is spread betting

In a nutshell, spread betting in the UK is a leveraged financial derivative that allows traders to speculate on the price movement of a wide range of financial markets, including stocks, indices, forex, and commodities, without owning the underlying asset. Profits from spread betting are tax-free, as they are exempt from capital gains tax and stamp duty. However, it carries a high level of risk due to its leveraged nature, making it more suitable for experienced traders.

In this article, we’ll explore what spread betting is, a popular yet complex form of financial trading.

You’ll gain insights into how spread betting works, its potential risks and rewards, and why it’s a favored choice for many traders seeking tax-efficient investment strategies.

This guide aims to demystify spread betting, providing you with the knowledge to understand its role in the financial markets.

This article was reviewed by Tobi Opeyemi Amure, a trading expert and writer at InvestopediaInvesting.com, and Trading.biz.

Key Takeaways

  • Spread betting allows you to speculate on financial market movements without owning the underlying assets. Simply take a position based on whether you think prices will rise or fall.
  • Leverage through spread betting magnifies potential profits but also losses – use stop losses and manage risk carefully.
  • Analyse charts with indicators to identify trading opportunities, then use spread bets to capitalise on predicted price movements.
  • Diversify across different markets like shares, forex, and commodities to manage risk, and size positions appropriately for your account balance.
  • Avoid common errors like over-leveraging and emotional trading by sticking to predefined strategies, reasonable position sizing, and stop losses on every trade.

Why Choose Spread Betting?

Spread betting offers a versatile and potentially lucrative form of trading for seasoned investors and newcomers alike.

As opposed to traditional share dealing, spread betting allows you to speculate on a market’s direction without needing to buy the underlying assets. This opens up opportunities to profit whether markets are rising or falling.

Tax Efficiency and Cost Savings

One of the biggest draws of spread betting is its tax-efficient nature. In the UK and Ireland, spread betting profits are exempt from capital gains tax as it is regulated as gambling.

You also avoid stamp duty and commissions that apply to share dealings. This enables you to keep more of your profit compared to other forms of trading.

However, tax laws depend on your region and personal situation. Consulting a tax specialist is advisable before relying solely on spread betting for income. Taxes may still apply to your profits in certain jurisdictions.

Spread betting providers also do not charge commissions, making it easier to try different strategies without racking up heavy trading fees.

These companies instead make their money through the spread – the difference between the buy and sell price of a market. So while tax efficiency and low commissions make spread betting highly cost-effective, you still need to account for the spread in your trades.

Leverage and Margin Requirements

Leverage is an integral aspect of spread betting that lets you gain huge market exposure with only a small amount of trading capital.

For example, you might only need to deposit 5-10% of the total value of your position. This means your potential profits or losses are magnified by over 10 times.

Such high leverage is a double-edged sword, however. While your gains may be exponential, losses can also quickly spiral out of control if you trade irresponsibly.

You need to deposit more funds if your account balance nears your total margin requirement, in what is known as a margin call.

If you fail to meet this margin call, your position will be closed automatically at a loss.

Therefore, leverage requires caution and care. Start small to get a feel for its impacts before increasing your market exposure.

More advanced risk management strategies are also advisable when trading on margin to minimise excessive losses.

Long and Short Trading Opportunities

Spread betting accommodates both long trades, speculating on rising markets, and short trades for falling market predictions.

This contrasts with stocks where shorting entails a complex lending process that increases costs.

Going long or short is equally straightforward in spread betting. Opening a long position simply means buying at the ‘offer’ price, while shorting involves selling at the ‘bid’ price. Your profit or loss depends on the difference between the opening and closing price.

These flexible options let you implement strategies betting on overall market momentum or short-term pullbacks:

  • Long-term bullish outlook: Go long expecting prices to rise over weeks or months. Close position to take profits or limit losses.
  • Short-term correction prediction: Short the market, then close your bet if prices bounce back from oversold conditions.
  • Hedging shares: Short correlated spread bet markets to protect existing share portfolios from downturns.

The ability to go short with ease makes spread betting well-suited for capitalising on falling or volatile markets, in addition to rising trends.

Understanding the Mechanics of Spread Betting

Spread betting allows you to speculate on a market’s price movements without owning the underlying asset.

Instead of buying shares or currencies outright, you place bets on whether prices will rise or fall. Your profit or loss depends on the accuracy of your prediction and the position size you take.

Understanding some key concepts is essential for navigating spread bets successfully:

Bid and Ask Prices in Spread Betting

When you look to place a spread bet, you will see two prices quoted – the bid price and the ask price:

  • Bid price – The lower price where you SELL to open a short position, betting on prices to fall.
  • Ask price – The higher price where you BUY to open a long position, betting on prices to rise.

The difference between these prices is called the spread, representing the provider’s built-in margin. A larger spread means placing trades will be more costly. But unlike stocks, you do not pay separate trading commissions in spread betting.

Bid and ask prices in spread betting.
Source: CFI

When closing your position, selling at the bid price or buying at the ask price realises your profit or loss depending on the price movement since opening your bet. Choosing the right position type based on your market prediction is vital.

Role of Leverage in Spread Betting

Leverage allows you to put down a small initial deposit relative to your overall position value.

For example, you might only need to deposit £100 to take a position worth £10,000. This gives you much greater market exposure than your trading capital would normally permit.

Such leverage significantly amplifies both profits and losses. A favourable price move could result in exponential returns, but an unfavourable move can also quickly drain your trading account. That is why leveraged spread betting is considered high risk.

It is critical to use leverage judiciously and maintain reasonable position sizing.

As a guideline, your total exposure should not exceed 5% of your account balance at any time. Start small if you are new to leverage and use stop losses to protect your capital against runaway losses.

Managing Risks with Stop-Loss Orders

Stop-loss orders help limit the downside when taking large, leveraged positions in volatile markets:

  • Standard stop-loss order – This automatically closes your trade at the best available market price once the price breaches your predefined stop level. Slippage from the stop level may occur.
  • Guaranteed stop-loss order – This enables you to close your position precisely at your specified stop level. However, you pay a premium for this guarantee.

Stop losses should be applied straight away after opening any spread bet. While not foolproof, they offer an additional layer of risk mitigation against spiraling losses:

  • Set the stop level where your maximum loss tolerance is reached.
  • Place stop orders below the market when going long, and above when going short.
  • Adjust stops to lock in profits as the market moves favourably.

Used properly in conjunction with prudent position sizing, stop losses are invaluable for enduring the turbulence of spread betting and financial markets.

Managing spread betting risks with stop-loss orders
Source: babypips

Setting Up Your Spread Betting Account

Before you dive into the markets, you need to set up an account with a trusted spread betting provider.

Choosing the right platform and account settings lays the groundwork for effective trading.

Potential clients should be careful to pick an established, regulated provider with good reviews and platform reliability. You are holding money with your spread betting provider so should take the same caution you would with any other financial provider like a bank or an investment platform.

Tom Salmon, Managing Director at Spreadex. From our recent interview.

Choosing the Right Broker

Your broker acts as the gateway to financial markets – their reliability and features impact your overall experience.

Consider factors like:

  • Regulation – Opt for Financial Conduct Authority (FCA) regulated brokers in the UK that adhere to strict conduct and capital adequacy standards to protect clients.
  • Trading platforms – Established providers like IG offer robust web and mobile apps covering thousands of markets. Check platform functionality and tools match your requirements.
  • Spreads and commissions – Compare spread sizes across assets to gauge trading costs. Remember spread betting itself does not charge separate commissions.
  • Market access – Leading brokers offer exposure to shares, indices, forex, commodities, etc on global exchanges with extended trading hours. Verify market availability aligns with your strategy.
  • Funding options – Convenient and quick deposit/withdrawal processes ensure seamless account funding management.

Reputable brokers like Spreadex enable secure, reliable market access catering to active traders, investors, and market newcomers alike.

Spreadex spread betting platform.

Check out our roundup of the best spread betting platforms UK.

Account Types and Features

Brokers usually offer a selection of account tiers suited to varying skill levels and trading styles:

  • Standard – The core account with access to the full product range, tools, and default leverage levels. Caters to most active traders.
  • Mini/Micro – Entry-level accounts with reduced minimum stakes and lower leverage, ideal for new traders.
  • VIP/Premium – Upgraded accounts with higher leverage, lower spreads, and access to premium tools/market support for professionals.

Understanding account features helps decide the best option for you:

  • Analyse minimum stake sizes and leverage limits relative to your capital.
  • Compare tools and market access against your trading plans.
  • Review spreads, margin rates, and commissions applicable.

Choose an account tier aligning with your situation as a beginner or active trader managing higher risks.

Funding and Managing Your Account

Once registered, you need to deposit funds to start trading. Most platforms allow bank transfers, debit/credit cards, and e-wallet payments. Consider aspects such as:

  • Ease and speed of deposit/withdrawal processes.
  • Associated fees for payment methods – credit cards tend to attract higher charges.
  • Typical processing times for withdrawals – 5-7 working days is common.

Critically, moderate your capital outlay and leverage use, especially when starting. Against highly volatile markets, losses can rapidly accumulate. Adopting smart risk practices is vital:

  • Deposit only capital you can afford to risk losing.
  • Use stop losses religiously for every trade.
  • Maintain reasonable position sizing relative to your account balance.

Following prudent capital management protects your finances and enables you to trade markets effectively over the long term.

Choosing Your Spread Betting Market

Spread betting accommodates a diverse range of financial markets, from indices and forex to commodities and bonds. Choosing markets that best fit your trading style and risk appetite is key to maximising opportunities.

Assess aspects like volatility, liquidity, analytical factors, and risk parameters when selecting markets:

Assessing Market Volatility and Liquidity

Volatility and liquidity impact decision-making across spread betting strategies:

  • Volatility measures the rate of price fluctuations within a market. Highly volatile markets like crypto and commodities can generate huge profits or losses over short timeframes.
  • Liquidity refers to the ease of entering and exiting positions seamlessly. Popular stock indices tend to be highly liquid compared to exotic currency pairs.

New spread bettors should favour higher liquidity markets with modest volatility. This ensures adequate trading activity while you refine analytical skills and risk management strategies.

Conversely, skilled traders can target volatile markets using options like guaranteed stop losses. Outsized profitable moves become possible with experience, prudent position sizing, and nerve.

Technical and Fundamental Analysis for Market Selection

Analysing market conditions direct you toward well-timed opportunities. 

Technical analysis involves interpreting historical charts and trends to predict price movements. Indicators like moving averages and oscillators signal good entry/exit points. Better for short-term traders.

Fundamental analysis focuses on macroeconomic factors, corporate events, political climate, etc that drive long-term prices.

Assess the overall narrative behind market moves. For instance in stocks, technical traders would target oversold prices and resistance breakouts based on chart patterns.

Fundamental investors look for undervalued stocks with strong financials and growth outlook.

Diversification and Risk Management

Every market experiences unique price cycles. Spread betting across diverse assets like shares, currencies, commodities, etc cushions your portfolio against sector-specific slowdowns.

Robust risk management also defends against market turbulence:

  • Stop losses limit overnight volatility impact
  • Define maximum loss limits per position and overall portfolio
  • Balance risk-reward ratios across your trades

Prudent diversification and risk controls will sustain you through inevitable losses when spread betting or any trading.

How to Place a Spread Bet: The Basics

Spread betting centers around speculating on asset price movements without acquiring the underlying stocks or currencies.

Instead, you bet on prices going up or down.

Choosing the Market and Position

Spread betting markets span global stocks, indices, forex, commodities, and more.

Consider aspects like:

  • Your existing market experience and confidence
  • Historic price patterns and volatility
  • Levels of liquidity and spread sizes

Research helps determine suitable markets matching your strategy. High liquidity warrants easier order execution. Moderate volatility provides trend trading opportunities without extreme unpredictability.

Next choose to buy (go long) or sell (go short) the market based on your directional outlook:

  • Long – Anticipating prices will rise
  • Short – Predicting prices will fall

The accuracy of your forecasted movement determines your payout.

Understanding Bid and Ask Prices

The spread betting provider quotes two prices – the bid and ask price:

  • Bid price – The sell price at which you open short positions
  • Ask price – The buy price for going long

The difference between them is the spread – representing the provider’s margin and trading cost.

Study price trends and charts to predict future movements. Buy at the ask price if bullish, or sell at the bid if bearish. Closing the trade at higher or lower levels realises your profit.

Spread sizes fluctuate across markets and periods due to volatility and liquidity changes. Minimising spread impact is vital for profitable trading.

Determining Bet Size and Leverage

Your bet size controls your potential profits or losses. Multiply it by how many points the market moves to calculate your payout.

For instance, £10 per point on the FTSE means a 20-point rise earns you £200 (20 x £10).

Leverage also lets you open larger positions with little upfront capital by borrowing from your broker. While amplifying potential profits, it equally magnifies losses. Approach leverage carefully.

Scale position sizes in line with account balance and risk appetite. Only risk capital you can afford to lose.

Implementing Risk Management Strategies

Volatile spread betting markets warrant risk mitigation strategies:

  • Stop losses – Close bets automatically if the price breaches a predefined level, limiting losses.
  • Guaranteed stops – Ensure closure at your exact stop level for a premium charge. Protects against volatility spikes.
  • Diversification – Spread bets across different markets to avoid overexposure.

Robust risk management separates successful traders from gamblers. Set stop losses on every trade along with position limits reflecting your account balance percentage.

Strategies for Successful Spread Betting

Spread betting accommodates diverse strategic approaches aligned to specific market conditions and individual risk-reward preferences.

Align your strategy selection to your trading style and objectives.

Consider key elements like:

  • Risk appetite
  • Analytical approach
  • Market of choice
  • Timeframes traded

Let’s explore popular spread betting strategies:

Trend Following Strategies

Trend trading aims to profit from sustained upside or downside momentum through technical analysis. Identifying the prevailing trend direction early allows advantageous entry.

Trend following strategy.
Sources: Investopedia

Use indicators like the moving average to spot new trends as prices consistently close above or below MA levels. Other supportive signs include higher highs/lower lows and breaking channel/trendline resistances.

Upon trend confirmation, take corresponding long or short positions. Setting stop losses below key support/resistance zones protects against reversals while trailing stops lock in profits.

Staying with trends maximises opportunities in trending commodities, stocks, and forex.

News-Based Trading Strategies

Market-moving news events like economic data or corporate announcements provide short-term trading possibilities.

For instance, a positive GDP print might boost indices. Alternatively, an earnings miss could see share prices plunge.

Leverage your market knowledge to predict likely price reactions. Open corresponding long or short positions quickly as the news breaks, before the market responds.

Rapid execution around news events provides an edge to bank profits in fast-moving conditions.

Arbitrage Opportunities

Arbitrage aims to exploit brief pricing discrepancies between correlated instruments. For example, FTSE 100 spread betting and CFD prices might diverge briefly.

This allows simultaneously buying the lower-priced trade while shorting the higher price. You profit once the discrepancy is corrected, closing both positions.

However such mispricings are rare and close quickly. Arbitrage requires SPEED in execution. Opportunities still exist for the observant trader.

Risk Management in Spread Betting

Spread betting’s leveraged nature warrants astute risk controls defending your capital against market turbulence. Always account for inherent volatility across chosen markets.

Deploy safety nets like diversification and stop losses while maintaining reasonable bet sizing aligned to account balances.

Using Stop-Loss Orders Effectively

Stop losses automatically exit positions limiting downside if prices breach predefined trigger levels:

  • Standard stop loss – Closes your trade at the next best market rate once triggered. Gaps can occur between specified and actual exit prices.
  • Guaranteed stop loss – Ensures closure at your precise stop level for an added premium. No slippage risk.

Stop losses should feature in every spread betting strategy. Consider key practices:

  • Set stop trigger levels where your maximum acceptable loss is reached.
  • Position standard stop-loss orders just below key support zones when buying. Place them above resistance when short selling. Guaranteed stops warrant further buffer zones.
  • Trail stops to lock in profits as prices move favourably.

Intelligent stop-loss positioning defends against unexpected volatility while allowing room for underlying trends to play out.

Diversifying Spread Betting Portfolios

Spread betting markets demonstrate varying risk-return profiles across asset classes:

  • Indices offer stable liquidity but limited volatility
  • Forex sees high liquidity and volatility
  • Small-cap stocks carry higher volatility and liquidity constraints

Spreading exposure over diverse markets cushions against isolated downturns. For instance, energy stock losses could be offset by a bullish FTSE bet.

Blend assets catering to your risk appetite. Conservative traders focus on high-liquidity markets with modest volatility.

Aggressive traders accepting more risk can target more volatile niches.

Capital Management and Leverage

Leverage allows controlling large positions with a limited capital base. But unrestrained leverage can rapidly drain accounts when markets turn.

Practice capital management habits aligning leverage to account balances:

  • Limit total exposure on any single position to 5% of your account value
  • Maintain a minimum 50% account balance buffers before adding new positions
  • Reevaluate leveraging if the account balance drops by 20%+, as further leverage becomes risky

Remember losses and margin calls are magnified by leverage. Defend your capital by leveraging prudently.

Spread Betting Examples

Understanding spread betting is best achieved by walking through practical examples across asset classes.

Let’s explore scenarios across stocks, forex, indices, and commodities to illustrate the principles in action.

Spread Betting on Stocks Example

Stock markets provide abundant spread betting opportunities. Consider this hypothetical bet:

  • HSBC shares trade at £5 per share
  • You predict an upside breakout above the £5.10 resistance
  • You “buy” a spread bet at HSBC’s ask price of £5 per point
  • You bet £2 per point with stop loss at £4.90 and take profit at £5.20

If HSBC rises to £5.15, you earn £15 profit:

  • £5.15 share price minus £5 opening price = 10 point move
  • 10 points x £2 bet per point = £20 profit

Equally, if shares fell to £4.80, you lose £20 with position closure via stop loss.

This demonstrates betting on price moves without acquiring the shares themselves.

Forex Spread Betting Example

Forex provides round-the-clock spread betting on currency fluctuations. Let’s walk through an EUR/USD example:

  • EUR/USD current spot rate is 1.1200
  • Based on technical analysis, you predict the euro will strengthen against the US dollar
  • You buy the spread bet at the pair’s ask rate of 1.1202 per point
  • You wager £5 per point, with 100K units position size
  • Stop loss at 1.1130, take profit at 1.1300

If EUR/USD rises to 1.1250, you gain $1,250:

  • (1.1250 – 1.1200 entry) x 100,000 units = 50 point gain
  • 50 points x £5 per point wager = £250 profit

Equally, you lose £350 if stopped out at 1.1130.

This demonstrates speculating on forex swings based on technical analysis without needing currency exposure.

Check out our guide on what is spread betting forex & how to do it.

Commodities Spread Betting Example

Commodities like oil and gold provide additional spread betting opportunities based on global supply and demand forces:

  • Spot gold trades at $1,950 per ounce
  • Heightened geopolitical tensions prompt you to predict rising safe-haven gold demand
  • You buy a gold spread bet at a $1,951 bid price, wagering £10 per point on 100 ounces
  • Stop loss at $1,920, take profit $2,000

If gold hits $2,000, you net £4,900 profit:

  • $2,000 – $1,951 entry price = 49 point gain
  • 49 points x 100 ounce position x £10 per point = £4,900

Conversely, a fall to the stop loss at $1,920 loses you £3,100.

This example illustrates profitably translated opinions on economic developments into gold movements.

Indices Spread Betting Example

Major indexes like the FTSE 100 or S&P 500 provide barometers for overall markets, suited to spread betting:

  • FTSE currently trades at 7500 points
  • You feel the index is due a pullback after a bull run
  • You sell an FTSE spread bet at 7501, betting £5 per point on a 100-point contract
  • Stop loss at 7550, take profit 7400

If the FTSE falls to 7350, you net £7,500:

  • 7500 – 7350 = 150 point fall
  • 150 points x £5 per point x 100 contract size = £7,500 profit

Equally, a rise to the 7550 stop loss triggers £250 loss.

This demonstrates short-selling index movements without needing market exposure.

Advanced Techniques in Spread Betting

Seasoned spread betting traders employ advanced technical and risk management strategies maximising opportunities while defending capital from market swings.

Utilising Technical Indicators

Indicators overlay mathematical interpretations onto price charts identifying trading signals:

  • Moving Averages (MA) – Determine trend direction. Price crossing above/below the MA signals continuation/reversals.
  • MACD (Moving Average Convergence Divergence) – Calculates momentum direction and strength. Crossovers of the MACD line above/below the signal line prompt trading signals.
  • Relative Strength Index (RSI) – Indicates overbought/oversold levels and reversals. RSI above 70 suggests an overextended uptrend. RSI under 30 flags oversold conditions ripe for long entries.
  • Bollinger Bands – Plot volatility levels highlighting extremities. Price touching the upper/lower band indicates overextended moves prompting pullbacks.

Combining indicators provides further confirmation before entering trades. For instance, prices breaking above the 50-day MA plus a bullish MACD crossover reliably signal uptrend kickoffs.

Charting Techniques and Pattern Recognition

Price charts present visual depictions of crowd psychology – learning to decode the patterns hands timing advantage.

Classic chart formations pre-empt impending market swings:

  • Head and shoulders – Trend reversal precursor. A peak between two smaller highs indicates distribution is underway.
  • Triangles – Represent consolidation before continuations or reversals. Ascending/descending triangles resolve bullish/bearish upon breakouts.
  • Flags/pennants – Brief pauses mid-trend before momentum resumptions in the prevailing direction.

Candlestick signals also highlight turning points ahead of time.

For example, bullish engulfing or piercing candles confirm uptrend resumptions to trade.

Hedging Strategies in Spread Betting

Hedging mitigates risk by placing opposing trades against current positions. For example, long stock bets could be protected temporarily by simultaneously short-selling correlated FTSE bets.

Popular hedging approaches include:

  • Portfolio insurance – Buying market put options or short-selling correlated instruments to protect holdings against bear runs
  • Pairs trading – Going long and short similar stocks or currencies to profit from relative outperformance
  • Arbitrage – Exploiting pricing differentials between markets to secure risk-free profits

Technical indicators, chart reading skills, and hedging keep professionals perpetually positioned ahead of market moves.

Common Mistakes and How to Avoid Them

Like any trading environment, spread betting harbours pitfalls trapping undisciplined traders.

Risk management! Use risk management tools like stop losses, and start small, so look for a provider like Spreadex which allows small minimum stakes.

Tom Salmon, Managing Director at Spreadex. From our recent interview.

Understanding the risks paves the path towards sustainable profits.

Let’s examine frequent errors and solutions:

Over-Leveraging and Its Risks

Leverage permits controlling large positions with limited capital through borrowed broker funds. However unrestrained leverage hands catastrophic blow-up risk when markets turn:

  • Losses accumulate quickly amid leverage
  • Margin calls get triggered rapidly by falling account equity
  • Forced liquidation follows at unfavourable prices

Avoid wipeouts by moderating leverage usage to account balances:

  • Limit overall exposure below 50% of account value
  • Maintain minimum 100% margins at all times
  • Utilise 30-50% available leverage during stable markets
  • Lower leverage if volatility spikes

Reckless bets inevitably deplete trading longevity. Appropriate leverage aligns risk with rewarded opportunities.

Ignoring Risk Management Tools

Robust risk controls prevent unexpected volatility turning winners into losers overnight:

  • Stop losses automatically close positions at predefined levels
  • Hedging mitigates risks through counterbalancing positions
  • Diversification minimises isolated position risks

Implementing defensive practices consistent with individual risk tolerance defends capital without limiting profit potential.

Emotional Trading Decisions

Mindset mastery separates successful traders from gamblers. Avoiding emotional impulses enables detached trading aligned to the market’s reality:

  • Make decisions based on pre-defined strategies, not intuition
  • Identify and acknowledge psychological bias early before trades
  • Walk away momentarily if feeling emotional stress
  • Focus on probabilities and acceptable risks, not absolute wins

Trading guidelines eliminate emotions destroying typical traders.

Inadequate Market Research

Insufficient analysis frequently manifests in ill-timed entries and exits. Ensure complete due diligence before trades:

  • Verify fundamentals driving market movements
  • Examine charts across multiple timeframes spotting technical clues
  • Backtest trade ideas through historical periods first
  • Update assumptions as new data emerges

Ongoing research tilts probability in your favour over time.

In summary, common trader pitfalls centre around personal discipline. Fortifying trading habits beyond textbook theory equips you to extract consistent profits from the world’s volatile markets.

FAQs

Is spread betting legal in the UK?

Yes, spread betting is legal in the UK and is regulated by the Financial Conduct Authority (FCA). It is a popular form of derivative trading, allowing traders to speculate on the price movements of various financial markets without owning the underlying asset.

Is spread betting worth it?

Spread betting can be worth it for experienced traders who understand the markets and are skilled in risk management, as it offers tax-free profits and the ability to leverage. However, it carries a high level of risk due to its leveraged nature and market volatility, making it potentially unsuitable for inexperienced traders. Success in spread betting requires a clear strategy, continuous market analysis, and disciplined risk management.

Is spread trading tax-free in the UK?

Yes, spread betting is tax-free in the UK, meaning profits from spread betting are not subject to capital gains tax or stamp duty. However, tax laws can change and may vary based on individual circumstances, so it’s always advisable to consult with a tax professional for current and personalised advice.

What does a negative spread mean?

A negative spread in finance typically refers to an unusual situation where the bid price of a security or asset is higher than the ask price. This can occur in thinly traded or illiquid markets and might indicate a pricing error, market inefficiency, or rapid market movements. Normally, the ask (sell) price is higher than the bid (buy) price, and a negative spread is generally an anomaly.

Is spread betting gambling?

Spread betting is often compared to gambling because it involves speculation on financial markets, which carries a high level of risk and the potential for loss, similar to betting. However, it differs in that it requires an understanding of financial markets and instruments, and is used as part of an investment strategy. Despite these differences, the high-risk nature and uncertainty in outcomes link spread betting closely to the principles of gambling.

What is the difference between spread betting and CFDs?

The main difference between spread betting and CFDs (Contracts for Difference) lies in their tax treatment and the way they are traded. Spread betting is tax-free in the UK, with profits exempt from capital gains tax, while profits from CFD trading are subject to capital gains tax. Additionally, spread bets are placed in a currency per point movement, whereas CFDs involve buying or selling contracts that mirror the value of the underlying asset.

You may also like:

Will Fenton is the founder of Sterling Savvy. He is a personal finance expert and writes about trading, investing, budgeting, and other financial topics.

Along with his education in Economics & Finance, he has experience working in the financial services industry in London working for one of the UK’s leading financial companies, “a trustworthy and respected provider of news, education and market analysis for the everyday investor”.

View Profile

Advertiser Disclosure

We may receive compensation from our partners for placement of their products or services, which helps to maintain our site. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn’t influence our assessment of those products.