Financial Spread Betting in the UK 2022
Financial spread betting is a unique form of speculative trading that offers retail investors tax-free earning potential with a high risk-to-reward ratio. This guide will run you through the core concepts behind spread betting, including popular strategies for investing in forex, stocks, cryptos and more. Use our list of the best spread betting brokers in the UK 2022 below to get started today.
UK Spread Betting Brokers
What Is Spread Betting?
Spread betting is a unique form of derivatives trading that provides a simple way to access many different financial markets for traders of all experience levels, from forex and stocks to cryptos and commodities. Spread betting allows you to speculate on the movement of different instruments without needing to own the underlying asset.
While often compared to gambling, spread betting has several characteristics that make it a genuine financial trading strategy. Firstly, rather than simply placing a bet and seeing if it comes off, you instead select the time at which you want to cash out, much like with trading. Additionally, many investors will approach financial spread betting with the same logical, attentive mindset that you would find with trading strategies for shares, forex and the like. Finally, spread betting is a fully regulated financial investment strategy overseen by the Financial Conduct Authority (FCA).
How Does Spread Betting Work?
There are two prices offered for an instrument by brokers, the bid price and the ask price. These are essentially the price at which you can buy (bid for) or sell (ask) an asset, and the difference between the two is called the bid-ask spread.
Spread betters make their money from predicting a movement in the spread of an asset or instrument. For example, if you think the price of Bitcoin (BTC) will rise, you would take an ‘up bet’ on the crypto and, after a certain amount of time, you would close the bet and make a profit or a loss.
Spread Betting Vs CFD Day Trading
You may be thinking this sounds exactly like regular CFD trading, and you’d be half right, they are very similar. The difference between the two lies in the mechanism of such an up bet.
Where in day trading you would purchase a unit that tracks the underlying asset and resell it (or vice versa) to profit from the price change, spread betting is much more of a, well, bet. When you place a spread bet, you simply decide which direction the price will move and how much money each unit of price movement should be worth.
For example, if you are bullish on the FTSE 100, which is offered at £6,955, you wouldn’t buy a certain number of shares for £6,955 each. Instead, you might place a bet at £20 per point (in this case pence) that the stock value moves. Then, if the stock value hit £6,960, you would make a profit of £20 multiplied by the £5 (500p) movement, which equals £10,000.
Leverage & Margin
A major selling point of financial spread betting is the opportunity to leverage trades to increase your profit potential and market exposure. This is achieved by brokers allowing you to place bets for much more money than you can front, with the excess taken up by the broker themselves.
When you spread bet using leverage, you may put down 5% of the trade yourself, which is called the margin. Let’s say you do this with a £50 bet, your earning potential would be the same as for a £1,000 bet with no margin.
Even though leveraged spread betting seems like a great option as a successful £1,000 trade would make a lot more money than a £50 one, it does come with its own dangers. When making unsuccessful trades using leverage, the losses you incur would be much larger. This is because losses are magnified at the same level, so a small price reversal could quickly eat away at your account value.
Additionally, if you were to bet with leverage and wind up losing more money than you have in your account, your broker will send you a margin call, and you will be indebted to them.
For these reasons, some risk management advice suggests spread betting without leverage.
The assets you can perform spread betting on are endless, limited only by the broker you trade with. This means that while spread betting is possible on cryptocurrencies such as Ripple or Litecoin, you would need an account with a broker that offered these instruments.
Ignoring broker limitations, you can spread bet on any of the following markets:
- Indices, e.g. FTSE 100, DAX, NASDAQ, VIX, Dow Jones
- Equities, including penny stocks and Apple shares
- Cryptocurrencies, e.g. Bitcoin & Ethereum
- Commodities, e.g. gold & silver
- Market sectors
- Interest rates
Spread Betting Strategies
Current events and the news, be it local or global, can have a massive impact on all financial markets. This has been exemplified in the sharp stock market drop following the COVID 19 outbreak or the 32% rise in Dogecoin the morning after Elon Musk named himself the Dogefather.
While these are unique cases, there are a huge number of traders and spread bettors that carefully follow the news to inform their strategies. Such traders will often choose assets highly sensitive to news events. For example, the influences of a government’s GDP report can ripple through their forex pairs, stock indices and options markets.
Some corporate events can have a large effect on certain financial instruments. One such event would be the successful bidding for a major business project, which would likely cause a bullish market response.
Another corporate action favoured by financial spread betting enthusiasts is the declaration of dividends. Many traders will closely follow corporate releases and AGMs to try to beat the announcement of dividends and profit from the subsequent price change. These occur because investors often buy up the stock before the expiry date (release) of dividends so that they can receive the payout.
Charts & Graphs
An alternative approach to spread betting is to analyse historical data with the use of live charts and graphs. Most of these strategies will make use of line charts and candlesticks along with a range of pattern tools, geometric indicators and volume levels. Some popular spread betting systems are moving average convergence divergence (MACD), breakout and reversal trading.
More beginners tips and scalping strategy guides for spread betting winners can be found here.
It is vital for success to carefully manage the risk you are exposing yourself to with each bet. All gurus and success stories that have made thousands or millions of pounds from spread betting will have a rigorous risk management strategy that they won’t stray from.
An effective rule of thumb is the 2% rule, in which no single trade can risk more than 2% of your available account balance. For example, if you have £800 in your account and are looking to place a trade, the position size and exit point you choose should not risk any more than £16. This approach will limit the potential for big losses and keep you making meaningful trades even after a run of losses.
Another great way to control your risk for maximum profits is the use of limit orders. While this may seem like another piece of unnecessary terminology, limit orders are a very useful tool. Limit orders are often called guaranteed stop losses and they guarantee that a bet will be cashed out when the asset’s price reaches a certain point. This helps mitigate the nightmare of mistakes or big losers costing you a lot of money.
How To Start Spread Betting
Find A Broker
The first step on your journey to becoming one of the spread betting millionaires is choosing a broker. Your brokerage can make a huge difference in your success but the ideal one is often a personal choice as there is a wide range of factors to consider that can sway your decision.
Not all brokers offer financial spread betting services, so be sure to choose one that will allow you to do it and support you through it. Often, market makers, whose exchange focus is on profiting from bid-ask spreads, will support spread betting.
When selecting a broker for spread betting, the size of the spreads should be a major consideration. Firms that offer the lowest spreads and no commissions will siphon less of your income and facilitate much larger gains. Regulation should also be at the front of your mind when making this decision, as an unregulated broker can cause you major losses through scams, which is often where the ‘spread betting ruined my life’ disasters come from.
Other important factors include:
- Platform options – most brokers offer MT4 but some bettors may prefer social trading or automated trading-focused platforms. For a full range of spread betting platform reviews and comparisons detailing the best platforms for beginners, see our list above.
- Minimum deposit – some brokers may have no max or minimum deposit limits
- Additional tools, e.g. online calculators and tax rules breakdowns from HMRC
- Welcome bonuses, offers, promotions and deals
- Mobile app support
- Instrument range
- Account options
- Holding costs
Once you have opened an account with your broker, deposited some funds and decided which instrument you wish to trade, you can begin to implement your spread betting trading strategy.
If you are following a corporate action or news-based strategy you should delve into the available information and start to make predictions as to the direction of price movements. For pattern-based trading strategies, you can start to analyse the charts available and use indicators to identify spread betting opportunities.
Once an opportunity has been found, you must choose the size of your bet, your targets and your exit points. All of these would ideally be informed by your money management strategy and your available capital.
Advantages Of Spread Betting
- Accessibility – Spread betting provides access to a wide range of financial markets throughout the day with 24/7 trading brokers, from forex to ETFs. On top of this, less capital is required for market exposure than with traditional trading strategies.
- Regulated – Spread betting is fully regulated in the UK by the FCA, which means that investors have added protection against scammers and unfair practices.
- Commission-free – Charges and fees can eat away at your earnings as a day trader, especially with large trading volumes. Financial spread betting, on the other hand, often entails no commission costs, with brokers earning money from the spreads offered.
- Tax-free – Profits from spread betting are completely exempt from taxation through HMRC in the UK. While other day trading and investing strategies are taxed, spread betting is free from the capital gains tax, income tax and stamp duty.
- Leverage – Spread betting can be combined with leverage to make bets that are greater than your capital can support. While leverage magnifies your profit potential, the risks of losses are also greater, so care must be taken in its implementation and robust risk management strategies should be used.
Disadvantages Of Spread Betting
- Spread sizes – The lack of commission in any competitive spread betting service presents a difficulty in earning money for brokers. Some may try to counter this problem with a large increase in the offered spreads, so prospective traders should always research several options before opening an account.
- Loss potential – With greater profit opportunity comes greater loss potential, especially if you are using leverage.
- Temptation – Financial spread betting, just like other forms of trading, can start to become addictive and lead to overtrading. If this happens, you will likely make dangerous trades without proper risk management, with spread betting becoming more of a gambling addiction than a job.
Spread Betting Tips
Practice Makes Perfect
One of the best tools offered by brokers and platforms is the practice account. Great for both those new to spread betting and those more experienced, demo accounts allow you to practice your using simulated money in a real-time environment, with no risk to your capital.
Not only useful for trialling a broker or platform, demo accounts can also be used to practice new strategies and risk management techniques and get to grips with new instruments without risking real money.
Entry & Exit Points
Another important point for a successful career in spread betting is the careful structuring and planning of the entry and exit points of each trade. Failure to do this can result in a few mistakes negating many wins, whereas following a good structure can magnify your returns.
For example, if you win 90% of all trades, you may consider your strategy effective and efficient. However, if all your wins are £20 but your losses amount to £100, you are only coming away with £80. Another trader with a lower win rate, say 60%, but an effective exit strategy that ensures losses never go above £20 and wins are at least £40 would be making a minimum profit of £160 for every ten trades.
Therefore, success is more than lots of wins, it is also the size of each win and each loss. The best traders will strike a measured balance between winning more often and losing less severely to produce the greatest profits.
Keep A Journal
A tool that gets nowhere near enough recognition in spread betting and other day trading strategies is the trading journal. Using a journal will allow you to look back at past trades, identify your shortcomings and improve your approach.
As you get more experienced you will begin to work out the key details that you require, but a good starting point is to use an excel spreadsheet trading journal to record price points, entry and exits, position size, profits/losses and the reason for entering the trade.
Every Day Is A School Day
Everyone can always stand to improve, especially in the world of financial spread betting. If you have a strategy that averages a 70/30 win/loss ratio and you have made a lot of money from it, you shouldn’t get complacent. Improve the success rate of your strategy, tweak the risk management system to afford larger trades at the same risk, look for new markets where you could earn even more.
With the world constantly evolving, it is only natural that the financial markets do the same. For example, the last decade has seen the birth and rise of cryptocurrencies, an innovative instrument with new trading potential. To maintain momentum with your trading, keep up to date with new advances in relevant technology and changes to the financial industry.
Additionally, there is a massive range of helpful resources and tips online that plough through the basics and complexities of spread betting, financial instruments and different strategies. Some of the most commonly used tools include:
- Online training courses, webinars and lessons
- YouTube videos & tutorials
- Forums & blog tips
- PDFs & eBooks
- UK Magazines
- Online guides
Automated Spread Betting
For those who have developed a robust and effective trading strategy that requires no additional work beyond identifying standard entry and exit points, automated trading can do your work for you.
Automated trading allows you to place several trades rapidly and simultaneously over many markets, allowing a much larger trading volume, which will reduce the chance of profits being eaten away through lost opportunity or slow reactions and calculations.
Spread betting is automated using trading robots, or bots, which turn your strategy into a trading algorithm that can either be downloaded off the internet or created yourself. Some online-sourced bots are free, though you may find some will charge for access or add commissions.
Detailed programming knowledge is not required to build your own spread betting robot; many software packages will do much of the heavy lifting for you, letting you build your algorithm visually. However, if you fancy some coding DIY, the application programming interfaces (APIs) often support Python bots best, though other languages are supported depending on the platform and broker being used.
Take It Seriously
Spread betting is a serious financial investment strategy that, if done correctly, can make you a lot of money in the long term and provide a meaningful income. If this were a simple endeavour that can make you easy money with little-to-no effort, everyone would do it. Instead, financial spread betting requires attention to detail, hard work and a calm, logical approach.
If you apply the same principles to spread betting as you would to any full-time job you aspire to master, there are few limits to what kind of living you can fund.
Final Word On Financial Spread Betting
Spread betting is a highly profitable financial endeavour that can bring you large profits without requiring significant capital deposits. It is possible to build a career out of financial spread betting, especially given the exemption it has from tax and the accessibility to high leverage levels. The good comes with the bad, however, and spread betting is a risky strategy when compared with other forms of short-term trading. This being said, a determined, logical and emotionally distant trader that follows the tips outlined above would be on the right track towards success.
Is Financial Spread Betting Illegal?
Spread betting, while illegal in the USA, is a perfectly legal financial practice within the UK. The investment strategy is regulated by the Financial Conduct Authority (FCA) within all UK territories.
Is Spread Betting Worth It?
Financial spread betting can be very lucrative, with many traders making a good living from its profits. However, it requires focus, attention and rigorous risk management to ensure success.
Is Spread Betting The Best Day Trading Approach?
Spread betting is one of many day trading systems, including futures trading, share dealing and binary options. While there is no best strategy, each has its own set of advantages and disadvantages. For example, financial spread betting is exempt from tax and has low capital requirements. For further detail on the different types of day trading, see here.
Is Spread Betting Taxable?
Not only is spread betting legal in the UK, but it is one of few tax-free countries. This means that no matter the size of your earnings or whether it is your sole source of income, your profits are not taxable, and you are not in danger of committing tax avoidance, though you also cannot use tax to offset your losses. While this is the case under current HMRC tax rules, these may change in the future so be sure to stay updated on the topic.
What Is Margin Spread Betting?
Performing spread betting on margin involves placing bets that you do not have the capital to fund. The concept uses leverage to expose bettors to larger profit opportunities over smaller price movements, with the broker picking up the slack. Often touted as dangerous, margin betting can magnify your risk potential, so requires a firm and robust risk management strategy.
- “Quarbs and Efficiency in Spread Betting: can you beat the book?” by David Paton (Nottingham University Business School) and Leighton Vaughan Williams (Department of Economics and Politics, Nottingham Trent University)
- “Spread Betting for Losers” by John Austin, Enigma Scientific Publications