What is spread betting?
Spread betting (as the name suggests) is a way of gambling in which the gambler bags profits or loss based on the accuracy or performance of the matter rather a fixed-odd win or lose.
In a fixed-odds bet, you either win or lose. For example, you bet that your favorite football team is going to win and if your team wins, you will bag a certain amount of profit and if it loses, your money will be gone.
But things are different in spread betting. There is no fixed win or loss. You bet on something and based on its progress or performance, your win or loss may change drastically. It was invented by Charles Kline McNeil for sports gambling.
What is financial spread betting?
Financial spread betting is the same concept of conventional spread betting but is used for betting on financial securities such as indices, currencies, stocks, commodities etc.
These securities are constantly traded and as the result, their price is constantly changing and as the result of this high volatility, you might lose and win multiple times within a few minutes, making the entire process of fixed-odds betting dysfunctional.
In a financial spread bet, you bet that the price goes up or down and based on the principal amount of bet and the amounts of change, you are going to win or lose.
Is financial spread betting legal?
It depends on where you live. If you live in the United States, it is illegal (you have options instead) but if you are living in the UK, it is legal and it actually has a few tax advantages. However, it is not unusual to find the firms operating in this business to be registered in unexpected countries such as Cyprus.
How does it work?
Here is the process. First, you have to find a broker or trading platform which enables you to bet. You have to sign up and most likely, have to prove your identity and some other KYC procedures to make sure that you are not going to launder money. Most of these firms provide some type of tutorials as well.
Then, you can deposit money into your account and start betting or as they call it “trading.” Just be aware that you can withdraw your money through the same route that you deposited the money in the first place.
While betting, the first thing that you realize is the fact that securities have a very high price compared to the minimum amount required to open an account but you still can open positions, thanks to leverage. Your platform will provide a leverage, which is different for each class of security. For example, your platform might have a 1:1000 leverage for indices which means that you can buy an index with a price of $2,000 for just $2 which sounds incredible. The position that you have opened is either a buy position (meaning that you bet that the price goes up) or a sell position (meaning that you bet that the price will come down).
Now, imagine that you bought a $100 stock for only $1 and opened a buy position, meaning that you bet the price goes up. Turns out that you are right and the stock goes to $110, at which point, you close the position. In the spread betting, you have bet correctly and will win the spread, which is $10 on a $1 bet. If you close the position on $130, you will win the spread which is $30 on a $1 bet.
However, the same applies in the opposite direction. If the stock price drops to $90, you will lose the spread which is $10 on a $1 bet. If it falls further down to $70, you will lose $30.
What is the difference between spread betting and actually buying the security?
There is a huge difference. When you buy 100 shares of Apple, you own a part of the company (even though extremely small). There is no leverage (you have to pay the full price). You will receive dividends from the company and might even have some perks such as investors discount. You might even be able to vote in the decision-making process of the company.
However, in spread betting, you don’t actually own anything. You have just gambled on the performance of the security and hence, will not receive any dividends or any perks. Spread betting is also not a way of long-term investment.
But there are two advantages of spread betting (despite many many disadvantages) versus buying the security.
First, the amount of return can be much higher than buying the security (due to leverage) and second, in some countries, there might be a tax advantage (such as the UK).
Is spread betting profitable?
Yes, if you manage to bet correctly, consistently.
If you buy a $100 security for $1 on a buy position and the security goes up by $30, you will have a 3000% return which is insane. While the person who has actually bought the security, in the same situation, will only have a 30% return. So, spread betting is extremely profitable.
However, there is a catch. If you guess wrong, the leverage will be your biggest disadvantage. If you buy a $100 security for $1 on a buy position and the price of the security drops to $70, you will lose $30 which is a 3000% loss which is also insane.
This illustrates the highly risky nature of spread betting. While you can have incredible amounts of profits, you may have huge amounts of loss, wiping out all of your capital.
Is spread betting investing?
No, it is not.
Investing is a process in which you allocate your capital into an asset based on the results of your analysis with a calculated and reasonable risk to earn a return.
In spread betting, there is no sound analysis. The main analysis that spread betters (or traders) do is technical analysis. In technical analysis, just astrology, people look at the price charts of a security at different time frames and try to predict the future movement of the price based on the past performance. However, in investing, people look at the underlying financial and operating status of the company to value the company.
Besides the methods of analysis, the risks involved in the spread betting is insanely high (even though the rewards are equally high) and it won’t allow anyone to plan for a predictable future.
Should I do spread betting?
Well, if you can see the future, definitely yes.
If you are among the less fortunate mass of people who cannot see the future, the short answer is no.
However, if you have some money which you absolutely don’t need for any purpose and like to statistically lose it, then go nuts.
But if you want to spread bet, be careful that you should not need the money, it should not be more than 0.5% of your net worth and you should not count on the possible return for your day to day needs.