What is Spread Betting?
While you can spread bet on sporting events, and even on anything from the result of elections to fluctuations in house prices, by far the largest market in the UK centres around finance and the value of financial assets. These assets can be:
- Shares, like Apple or BP
- Currencies, like the euro (EUR) or US dollar (USD)
- Commodities, such as gold, oil or sugar
- Stock indices that track the performance of a group of shares, such as the FTSE 100, or Nikkei 225
- Other financial products such as interest rates, government bonds, options, etc
At any one time, each of these assets is worth a certain amount of money. This is its price or market value, and it changes over time.
Today one share of Apple might be worth $112, but tomorrow its value may have risen to $115. Similarly, one euro could be worth around 85p this week, but in two months’ time it might have dropped to 80p.
Financial spread betting is simply betting on how the value of a financial asset will change in the future. In most cases, you’re betting on whether it will rise or fall. If you think the price of the asset will go up, you ‘buy’ (also known as going long). If you think it will fall, you ‘sell’ (go short).
If the price moves the way you anticipate, then your profit will continue to grow the further it goes. However, if the market moves against you, your losses will increase as the price movement becomes greater.
Crucially, you never need to physically own the underlying asset. For example, you could speculate on the price of oil without actually having to own any oil. And as you’re just betting on the direction oil will take, profits can potentially be made from the price either rising or falling in the underlying market.
Why do People Choose to Spread Bet?
When you trade financial assets in the traditional way, you normally have to pay capital gains tax on any profits you make. However, spread betting is classed as gambling, which is exempt from CGT.
It’s also free from stamp duty – a tax you typically face when trading shares. That’s because you never physically own any shares with spread betting, you just bet on their value.
Remember that tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.