What is Spread Betting? Definition and explanation of the term

What is Spread Betting?

Illustration: What is Spread Betting? Definition and explanation of the term

Spread betting is a form of derivative trading, where you do not have to actually own the asset that is underlying the trade that you are conducting. As a spread bettor, your work will be guessing or rather speculating on whether the asset under consideration will fall or rise in value. Spread betting was invented by a mathematics teacher who later became a securities analyst, by the name of Charles K. McNeil. However, spread betting is not allowed in the USA, until certain legislation can be put in place in order to regulate the trade.

Spread betting usually takes place when a spread betting provider, which is usually a company solely dedicated to spread betting, provides investors with two prices for a specific asset (which could be gold, silver, shares, oil or any other commodity). The two prices are the price at which you can buy the asset or the price at which you can sell the asset. The difference between the two prices is what is referred to as the spread.

If an investor thinks that the asset in question is likely going to rise in the future, then the investor will ‘buy’ the asset in question, something that is termed as ‘going long’. If the asset indeed rises in value, there will be a multiplier effect on each numerical rise of value of the asset. This means that if an investor bought an asset at 10 USD per point at an offer price of 4000USD, and at the end of the trade the asset had climbed in value to 4100at USD, then that specific investor would have gone home with 10*100= 1000USD as profit.

If an investor thinks that the asset in question will fall in value from the price listed the beginning of the trade, then the investor might decide to ‘sell’ the asset at the listed selling price. If by the end of the trading period the underlying asset will have lost value, then the investor would have made money by selling the asset at a price higher than the current value of said asset. That is spread betting in a snapshot.

What to look out for when spread betting

The opportunity to make a lot of money really quickly comes with attendant costs. Spread betting is a double edged sword which could cost you dearly if you are not prepared to lose some money along the way. Spread betting is a margined product. This means that due to the fact that there is a huge potential of you losing a lot of money if the trade does not go in your desired direction, the spread betting provider will need you to put a percentage value of the underlying asset as collateral so as to protect itself from the consequences of your trade.

The deposit that you make with the spread betting firm is what is known as the margin. The amount of money that you will have to deposit with any given spread betting provider varies according to each firm. However, this is usually pegged at around 10% of the value of the bet that you have placed with the spread betting provider.

The sad news is that if your trade goes so wrong that your losses threaten to exceed the margin deposit that you have placed with the spread betting firm, the firm will issue what is known as a margin call. This is a call for you to either put out more money to enable the trade to continue with you in it, or the firm will have to lock you out of the trade, and you will end up with a loss in your account.

Spread betting is very fast paced, and it will require nerves of steel in order to be successful in such a fast paced environment.