Spread Betting

spread bettingSpread betting is a concept that originated in the world of finance as a way for people to bet on the price movement of oil, shares, interest rates and other financially related interests.  It was recently adapted to the world of sports betting where the concept, although slightly different, performs the same function.

The main difference between financial and sports spread betting is that the market dictates the price more with financial.  Whenever the share price of a company moves, it will automatically adjust on the company’s system.  With sports spread betting however, the firm is responsible for setting a spread and manually adjusts  this whenever bet volumes go one way.  For example if there was a cricket match where the spread on the total number of runs was 3200-3300 and more people were betting above this figure, the spread betting company might adjust the spread to 3400-3500.

There is evidently a lot more work involved with maintaining the sports side of things, in a similar fashion to how bookmakers make their odds.

Although sports spread betting is still pretty new, many people have adopted it due to its high intensity, high risk nature.  You are placing bets worth far in excess of what your account balance is so you can easily find yourself making vast sums of money.  Equally, however if a bet goes dramatically against you, you can find yourself owing the company an considerable amount of money too.

So to summarize, sports spread betting, although it is still a new concept, is becoming ever more popular.  It is a leveraged instrument meaning bets can be placed that are worth more than your account balance.  This means you can quickly win or lose considerable sums of money so it is very important that you take care when placing your bets.  Some of the top companies out there include the likes of Spreadex, Sports Spread and Sporting Index with the latter being the most popular on the market.  Whichever one you sign up with you should be eligible for a free bet so check the terms and conditions out before you sign up.

History of Spread betting

Spread betting was conceptualised in 1970s America; Wall Street firms first used it as an alternative way to deal shares on behalf of their clients. Traditional share dealing cost a lot in terms of commission and resources; they saw the opportunity to cut that cost by becoming market makers themselves. Spread betting however also offered many institutional investors and traders a much cheaper way to hedge their share trades, and it still does for 1000s of independent traders today.

Traditional share dealing VS spread betting from the perspective of Wall Street firms and brokers worked as follows:

Consider the situation where investor A wants to buy 100 shares of XYZ company, and at the same time investor B wants to sell short 100 shares of the same XYZ company. Before spread betting was available, those Wall Street firms acted as stockbrokers, and they would have to facilitate investor A and investor B as 2 separate entities. This required the simultaneous management of 2 different transactions and incurred the related stock exchange fees. With spread betting, both clients A and B have the opportunity to make the same transaction, except that instead of buying or selling short the shares of XYZ, investors now just bought or sold at the ‘spread’ without any need for a broker. As a result the 2 clients’ orders cancelled out resulting in massive savings for the dealing firm without affecting the investors in any way.

Let’s assume that a 3rd investor C comes along and buys at the spread price; this 3rd investor will be betting at a particular pound per point level which is equivalent to owning a number of actual shares of XYZ company’s stock. Let’s say that the spread betting firm has an imbalance i.e. investor A buys the equivalent of 100 shares, investor B sells the equivalent of 100 shares, but investor C buys the equivalent of 50 shares then the market maker firm (or spread betting firm) has an excess long trade of 50 shares. This would require the firm to hedge this risk either by placing an identical bet to investor C with another spread betting company, or by buying 50 actual shares of XYZ. Through this the overall market becomes balanced, and those investors who predicted the market right would make a profit while the dealing firms take the commission (the spread).

Spread betting is more affordable than actual share dealing because it requires much less capital than actual share dealing (all positions are leveraged). Spread betting firms are not like traditional fixed odds bookmakers; they are perfectly happy with winning clients as their income is made on the spread. In traditional fixed odds gambling, it is clear that bookmakers don’t like winning clients. Just a small amount of research on fixed odds bookmakers will turn up many clients whose accounts were closed, or clients who are refused legitimate payouts for all sorts of ridiculous reasons. This is simply not the case with spread betting. A spread betting firm makes money in a number of ways, but on every trade they take a small amount of profit from the spread. They also earn money on interest and they fully hedge their real exposure to the markets making it easy for them to payout a winning trader. In fact there are traders in the UK who make over ₤1 million a year spread betting on stocks and commodities without having any issues withdrawing their winnings. In addition to that, spread betting firms will actually use the knowledge and betting patterns of long-term winning traders to predict market movements.

Opportunities for new traders:

Spread betting offers an exciting and very affordable way to deal in the financial markets. A new trader can test their trading skills at a fraction of the cost of traditional share/commodity dealing. Typically the cost of dealing shares in the traditional way requires 100% capital commitment, whereas with spread betting the trader only has to commit a small percentage of the total value of the trade. This is known as a margin requirement and ranges from 5% to 25% depending on the instrument being traded and the spread betting firm in question. In addition to that, there’s no capital gains tax on spread betting.

However the risk of losing money is relatively high for new traders. This is often caused by inadequate account balance, bad money management and badly planned trades. The spread betting companies themselves are not the reason why many traders lose, the consistency of successful traders, both big and is solid proof that these firms really support winners!

Leave a Reply

Your email address will not be published.