If you were to describe spread betting in two words, it would be these; ‘high risk’. Unlike traditional gambling, where it is only possible to lose your stake money, the profits and losses which can be incurred through spread betting are limitless. The scope of the method is unrivalled: you can bet on anything from sports to politics to financial markets to housing prices.
The golden rule of spread betting is never to get entangled unless you know exactly what you’re doing. Although spread bookmakers must always be regulated, this does not mitigate for investor ignorance – that responsibility falls solely on your own head.
How Spread Betting Works
Imagine that an election is approaching and you’re certain that Labour is going to do better than the opinion polls and the bookmakers are suggesting. A spread bookmaker is quoting Labour to win 235-240 seats. As a punter, you can either place a ‘down-bet’ from 235 or an ‘up-bet’ from 240. Because you’re confident that they’ll outperform these figures, you make the latter. For fear of losing money, you lay a cautious bet of £3-a-point.
If Labour wins the election with exactly 240 seats, your bet ends up all square. However, if Labour win 260 seats, then you make a £60 profit (calculated by taking the result of 260, subtracting your opening level of 240, and multiplying by your £3 stake). If Labour do badly and are awarded only 205 seats, then your bet will incur a loss of £105 (240 minus 205, times £3). In the unlikely event that Labour won no seats at all, your loss would be £720 (240 minus zero, times £3).
These trades can be closed at any time, and do not have to be left to expire. This means that if, in our example, an encouraging poll caused the bookmaker to raise their spread on Conservative seats from 235-240, to 250-255, you could then choose to stick with the bet until election night, or close early at 250 and receive an immediate profit of £30 (250-240, times £3).
Spread betting on politics and sport is pure gambling. However, spread betting on finance can be many other things: a tax-free way of trading shares, a means of making short-term investments for a few weeks or months or a way of hedging exposures in your personal finance.
The benefits are clear. Whereas share trading incurs 0.5% stamp duty and stockbroker’s commission, and you are liable to capital gains tax on profits that exceed your annual allowance, making an up-bet on a share via spread betting produces the same exposure as buying shares in the ordinary way, but you are liable for neither stamp duty nor stockbroker’s commission. The real advantage of spread betting is that you can go ‘short’ on the stock i.e. make money if the price falls. This ability to cash in on the decline of stocks and indices such as the FTSE 100 during miserable stock market periods has ensured that many spread betting traders have still profited.
Big Profits… and Bigger Losses
There are several notable figures that have made incredible sums of money from spread betting over the course of its 25-year history. The largest gain ever came in 1997, when one fortunate punter made £5m from a trade on the exchange rate between the pound and the French Franc. Another trader made a seven-figure profit during the dotcom meltdown, making £1 million over several months through down-bets on a collection of technology stocks including Marconi and Riversoft.
However, losses are equally common. The largest losses tend to be smaller, since bookmakers step in to close bets if they fear that the individual will struggle to meet their losses, but one Tory supporter still lost £120,000 through an up-bet on Conservative seats at the catastrophic 1997 General Election.
Spread betting is a medium which can bring about breath-taking profits but also devastating losses, which means that it’s not suitable for the uninitiated. If you’re interested but clueless, therefore, it is always a good idea to start by opening a demo account with a provider such as Spread Co, so that you can practice without consequence. If you’re one of the brave few willing to take the risk, then make sure you know what you’re doing.