Why Spread Betting Is the Best Way to Bet on Financials

Everybody has their favourite type of gambling, and for me, it’s betting on financial markets. There’s something about staring at all the ticker symbols and real-time trading charts that speaks to me. And I know that if you’re reading this, you’re at least curious about how betting on financial markets works.

I’ve tried many different ways of betting on financials, and the best I’ve come across for people from the UK is spread betting. There are pros and cons to spread betting, like any other form of gambling. But, as I’m going to demonstrate, the pros far outweigh the cons.

So, what is spread betting? How does it work? And why am I so keen on it? I’ll cover that as well as some tips and tricks for winning financial bets in this guide to spread betting in the UK.

Spread Betting Explained – How It Works

You shouldn’t confuse financial spread betting with spread betting on sports. The two are completely different disciplines.

Spread betting in the context of financial markets is betting on the price direction of a stock, commodity, share index, currency, or a number of other financial assets.

An example will help clarify this concept. Let’s say that I believe Donald Trump will announce a new trade deal with China close to the 2020 election. I also believe that the Dow Jones Industrial Average (DJIA), the NASDAQ, and other major US stock exchanges will reach new highs as a result. I want to bet on that outcome, and I decide to place a spread bet.

Instead of buying into any of those indexes through a mutual fund or by picking individual stocks listed on these indexes, I can bet on the price direction of the index as a whole. I can also place spread bets on individual stocks. In this example, I’m going to bet on the DJIA index.

Since stock indexes are charted in points, I’m going to wager that the DJIA will climb another 1,000 points in the weeks after Trump announces the new trade deal. I’ll wager £1 per point that it happens, and I’ll time that trade for about six months before the election since I think that’s when the announcement will come.

If I’m right, for every point the DJIA climbs, I’ll make £1. If I’m wrong, then I’ll lose £1 for every point it drops below the price I opened the trade at. I can set a stop limit to make sure the bet automatically closes when I’ve reached my predetermined loss threshold.

There are a few things to note here.

• I just used £1 as an example. Some spread betting platforms will allow you to wager up to £1,000 per point if you have the capital to cover it.
• Timing is incredibly important when making spread bets. This is because you could be temporarily wrong before you are right, and you could get wiped out before your bet comes good.
• I don’t necessarily have to bet on the market going up. With spread betting, I can also place a short bet, wagering that the market will fall.

I just wanted to point these things out in advance. I’ll get into them in more detail below, but for now, I wanted to make sure you understand that my example is just that—an example. There are lots of different trades I could make, and the amounts or direction I bet on could be totally different than this example.

So, let’s say Trump announces his new era of trade with China, the DJIA rockets on positive investor sentiment, and I reach my £1,000 profit goal. Do I have to stop there? No, not at all. I can let the trade keep running as long as I think the market is going to keep climbing. I can even automatically program it to close if the market drops 10% while I sleep. This mechanism is called a stop-loss.

Hopefully, you’re beginning to get as excited about financial spread betting as I have been for the past 15 years.

Advantages of Financial Spread Betting

So, why not just buy into an index fund or stock like everybody else does and sell it when I reach my target price? Well, I could do that, and there’s nothing wrong with doing so.

However, there are multiple advantages to spread betting as opposed to trading binary options or buying the underlying financial assets I want to bet on. I’ll outline some of them for you now.

Capital Gains Tax Doesn’t Apply

If you buy and sell stocks or financial assets, you have to pay an 18% Capital Gains Tax to HMRC. However, when it comes to spread betting online, you escape the dreaded tax man.

Spread betting is free from tax as of fiscal year 2019/2020. If that changes in the future, I’ll be sure to update this article, so if you’re still reading this, it means spread betting is still free from Capital Gains Tax.

18% of your profits can be a fair chunk of change. Wouldn’t you much rather keep it and possibly use it as capital for your next trade? I know I would.

Without a doubt, the fact that spread betting is tax-free is my number one reason for choosing it. The government views it as out-and-out gambling, and that’s why it isn’t classed as financial trading proper and isn’t taxed as such.

You Can Bet Both Ways

Remember how I said above that I could also bet on the stock market going down? This could happen in our example if Trump’s trade deal failed to materialize or if it turned out to be a flop. Short selling is for the gutsy, but most UK spread betting platforms will allow you to place short bets.

Some of the most profitable financial bets in world history have been short trades. Billions have been made by gutsy short sellers who saw an opportunity when everybody else saw disaster.

Sure, some people think it’s unethical, but financial betting is warfare. And the punter on the other side of the table would take the money from you without batting an eyelid if the trade went the other way.

Which brings me to another important advantage.

Spread Betting Is a Zero-Sum Game

Unlike betting on sports — which involves a built-in bookmaker’s advantage — you’re not wagering against the house in spread betting. Instead, you’re wagering against other traders on the other side of the bet. There are no odds to contend with and, therefore, you’re not at an inherent disadvantage from the outset.

Most casino games have a house edge which favours the casino, and most bets you can wager on at the bookmakers have odds which ensure the bookie makes money no matter what.

However, the spread betting platform makes money on the spread, the difference between the actual market price and the price they’ll open the trade at. You have to cover that difference before you’re in profit, so keep an eye on it.

Spread aside, the larger point is this—in spread betting, you’re up against other financial punters and traders. You have just as much chance of winning the bet as they do. In fact, if you do your homework and have impeccable timing, you can bet with a significant advantage.

This also means you can stop feeling guilty about short trading. Since you’re not actually selling the underlying asset, but are just piggybacking on the already freefalling price, you’re not wrecking a company and costing jobs like stock short sellers are.

You Can Use Leverage to Maximize Profits

The philosopher Archimedes once said, “Give me a long enough lever and a fulcrum on which to place it, and I will move the world.”

While that’s a fairly dramatic statement, it does make a point. Leverage can accomplish amazing things. In spread betting, you can borrow up to £100 for every £1 you have on deposit to take maximum advantage of financial opportunities as they arise. This is called leverage or trading on margin.

Let’s say that you’re looking at your trading platform and you have the financial news channel on TV. The presenter announces that Warren Buffet, stock trading genius and CEO of Berkshire Hathaway, has died. You know with almost 100% certainty that the stock price of his company is going to tumble in the short-term, and you want to open a short trade to profit from this otherwise unfortunate event.

With financial leverage, you can place a much bigger bet than you would otherwise be able to. However, to borrow anything like 100:1 ratios, you’ll need to have more capital in your account than most of us average bettors would ever have access to.

That said, it’s well within most people’s means to place bets at 2:1 or even 5:1 leverage, therefore taking home between 200% and 500% more than you otherwise would have.

While this is one of the advantages of spread betting, I rarely use leverage. It significantly changes the risk matrix, and you can end up losing trades because of it. In fact, if you don’t know what you’re doing and don’t use stop losses to cover your risk, you can lose more than you deposited into your financial betting account.

Be careful if you use leverage. At the very least, be 100% sure you know how it works and that you’ve done the math before you place a leveraged trade.

It’s Super Easy to Open and Fund a Spread Betting Account

Perhaps this is the best reason of all to choose spread betting over traditional share dealing. While you’ll have to find a broker and open an account (which can take days) to trade the traditional way, you can open an online spread betting account in minutes.

The best spread betting sites have registration processes that are as easy as registering at online casinos. You fill in some personal and contact details, agree to the terms and conditions, verify your identity, and off you go.

You can fund your account with simple, one-click bank transfers, too. Unlike some betting sites, withdrawals will typically land in your account within minutes. Most sites I have used don’t charge withdrawal fees.

Getting started with spread betting is an easy and hassle-free experience. I opened my first account when I was 18 in about five minutes flat. You can do the same, and most of them also facilitate demo trading until you get the hang of it.

Spread Betting Tips and Strategies to Win

As I’ve hinted at several times throughout this article, I’ve been spread betting for a long time, for almost two decades. In that time, I’ve had some unbelievable windfalls, and I’ve made some serious mistakes, too. I’ve put together this list of spread betting tips to help you enjoy more wins and fewer losses.

Beware of the Spread

I mentioned the spread above, but it deserves further clarification here. The spread is the difference between the real market price and the price given on the spread betting platform.

You can easily cover a two-point spread with a good trade. However, in some markets, I’ve seen spreads of 20 points or more. That’s a fair amount of ground to cover before you’re in profit, especially if your trade goes the wrong way temporarily.

Beware of the spread and make sure you factor it into your spread betting calculations. Think of it as ground you have to make up before you’re even. The shorter the distance, the better.

Don’t Bet on What You Don’t Understand

This is sound advice for any form of financial betting. While price can only go two ways (up or down) in the long term, you should avoid betting on exotic instruments you don’t understand. For example, betting on exotic currency pairs or cryptos like Bitcoin without a solid understanding of the forex or crypto markets is unwise.

Stick to things you understand, such as stock prices or the price of oil/gold. If you can’t pinpoint at least a few of the factors which move the prices of these assets, do some more homework before you bet on them.

Which brings us nicely to…

Time Your Bets Properly

There are certain times when stocks, markets, and the prices of commodities are going to be highly volatile. That’s when you can make real money. You need to know when these price movements are going to happen by studying an economic calendar.

If you’re betting on stock indexes like the DJIA or FTSE, look out for important economic information releases. Exports, manufacturing data, jobs created, and other financial data can move these indexes violently up or down. As a general rule of thumb, good news will move them up, and bad news will batter them. Of course, both of these are relative to what investors already expected to happen.

If you’re spread betting on stocks like Facebook, Home Depot, or Ford, earnings season is when the fun begins. Every quarter, these companies release their earnings, and big moves can happen in the days leading up to and after these announcements.

In spread betting, as in life, timing is everything.

I hope you’ve enjoyed this guide to spread betting and that you understand why it’s an awesome way to bet on financial markets. If you found it useful, why not share it with your friends?