What is Spread Betting and How Does it Work?

In the financial market, you can trade in various underlying securities with the speculation or investment perspective. But in both situations, you have to enter into the buy or sell contract that is executed digitally and you own the underlying security.

In the cash market, you can buy or sell stocks, or in the derivatives segment, you can enter into a trade position with the buying or selling of future or option contracts with different strike prices and expiration periods. In all such trading conditions, you have to own the securities either for one day or for a short term or for the long term period.

But there is another area where you can stake your money and earn profits. Yes, I’m talking about spread betting which is different from these and you can bet on various types of financial instruments like equities, forex, commodities and other assets. You should know about spread betting, how it works, whether it is worth it or profitable or not.

What is Spread Betting?

As the name suggests, spread betting means, when you bet on the future direction of a financial derivatives without taking the ownership of the assets. It is purely a betting not an investment on the derivatives of the underlying assets like equities, commodities, currencies or cryptocurrency with the speculation that either the price will rise or fall.

In spread betting, you don’t need to own the underlying security, instead, you have to simply speculate the price movement. Based on your speculations you will earn a profit or incur a loss and you don’t need to pay any taxes as you don’t take ownership of the asset.

What Does Spread Mean?

Spread is simply the difference between the buy and sell prices you’ll pay when you trade. This means, in a spread, a company quotes two prices, the bid and ask price which is also known as the spread, and when you have to bet, whether the price of the underlying security will be more than the ask or lower than the bid price.

Don’t confuse spread betting with spread trading which involves taking the compensating positions in the different securities and earning the profits with the difference in the price between the underlying securities increase or decrease over time.

How Does Spread Betting Work?

Spread betting is like gambling in which you do not buy or sell any underlying security, instead, you bet on the price movement with the speculation of rise or fall in the near future. You can buy or go long if you expect the price of the underlying security will rise, while you can sell or take a short position if you speculate the price of the underlying security will fall.

In spread betting, the spread betting company quotes the spread bets or a price at which you can bid (buy) and the price at which you can ask (sell). The difference between the bid and ask is spread and spread betting company books profits from this spread.

You can go along with the bid price if expect the market will rise or the price of the underlying security will rise and can short with the asking price if anticipate the price will go down. The spread betting procedure works without commissions or taxes and duties. One of the main characteristics of spread betting is you can enjoy leverage with a wide variety of assets.

Spread Betting Examples

To make understand better about spread betting and how it works, let’s take an example. Suppose the stock price of a company named XYZ is trading at Rs 205, and a spread betting company has quoted the bid and ask prices of Rs 200 and Rs 210 respectively. And if you are bearish on this stock and believe the price of XYZ will come down to Rs 200, you bid to sell at Rs 200 and decided to bet Rs 20 on every point the stock falls below Rs 200.

And if the stock price of XYZ company falls to the bid and ask price of Rs 190 and Rs 195 respectively, then you can close your trade with the profit of Rs {(Rs 200 – Rs 195) * Rs 20 = Rs 100}. If the price rises to bid and ask prices of Rs 210 and Rs 215 respectively, then you can choose to close your trade with the loss of {(Rs 200 – Rs 215) * Rs 20 = – Rs 300}.

What is Margin in Spread Betting?

Just like entering into short-selling into the derivatives in the equity or commodity markets, in spread betting you have to deposit certain margins. Yes, to bet on spread you have to deposit the initial small amount as a margin to open your position. In spread betting there are two types of margins required, let talk about this.

Deposit Margin: This is an initial amount required to deposit to keep your position open, that is calculated in percentage on your total trade value.

Maintenance Margin: This is a kind of additional fund that might be required if your open position enters into loss, that has been not covered in the initial deposits. You will be informed or asked as a margin call to deposit the additional funds or close your position.

Taking the above example to enter into such a spread, the company will ask you to deposit a margin of around 20%, which means you have to deposit Rs 800 {(Rs 200 * Rs 20) * 20%} into the company’s account to cover the bet and keep it open.

Recommended Read: Commodity Price Risks

Is Spread Betting Worth?

Spread betting is beneficial in terms of providing short-term trading opportunities for both sides long and short, utilization of leverages, and out-of-hours trading facility and there is no tax and commission levied on such betting allowing you to earn duty-free betting.

The downside of spread betting is you have to deposit the margins, and owing to high leverage and unexpected fluctuation in the price you can face high-margin calls. Apart from that you also need to choose from the betting price from the widespread, if the volatility in the market or the underlying security is high due to company-specific unfavourable news.

Is Spread Betting Legal in India?

Spread betting in countries like the UK is very common, in India you can open an account with a spread betting company which is subject to approval from the government authorities. You can participate in spread betting in financial instruments including stocks or major indices, or derivatives of commodities, forex, cryptocurrencies and interest rates.

In India spread betting is legal and there are various companies and websites providing spread betting services. But there are certain conditions like you must be above 18 years old and must have opened the betting account with such companies to bet.

Wrapping up

Spread betting is like gambling in which you bet on the price of derivatives of any financial instrument without taking ownership of the underlying asset. You have to simply speculate the price of the underlying security whether it will rise or go down as per the bid and ask quotation given by the betting company with a margin of money deposited.

You have to bet the price movement and choose between the spread bets given by the betting company in which you can buy (bid) or sell (ask) as per the quoted price. The difference between the bid and ask spread is the profit the betting company can earn and you can earn the profit if your speculation is right and the price moves as per your expectations

Recommended Read: Pros and Cons of Trading in Metals