What is spread betting and how does it work?

Published on: 08/10/2021 | Modified on: 14/08/2023

Spread betting is a popular form of derivative trading that lets you speculate on the price movements of financial assets, such as indices, forex, commodities, and shares, without actually owning the underlying asset. This guide to spread betting tells you all you need to know about how to spread bet.

Spread betting is margin-based, allowing traders to deposit a set percentage of the full value of a trade, and therefore offers greater exposure to the markets compared with traditional investing. Trading with margin (or leverage) also amplifies both profits and losses equally.

Reviewed by

Michael Hewson

Chief Market Analyst

mhewson_CMC

Content Links

What is spread betting?
How does spread betting work?
Understand the key features of Spread betting
What is the spread?
What is the bet size?
Spread betting trading example
What are the advantages of spread betting?
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What is spread betting?

A simple spread betting definition is that it’s a wager based on an accurate prediction, rather than a simple win/lose type bet.
You can spread bet on all kinds of instruments, including shares, indices and commodities.
You don’t own the underlying asset. Instead, you speculate on the direction you think the market will go.
The spread represents the difference between the buy and sell prices.
You can trade on both sides of the market, going long (‘buy’) or short (‘sell’), depending on your view.
You only need to deposit a percentage of the full trade value but you have greater exposure to the markets compared with traditional investing. Your profits and losses are amplified based on the full value of the trade.
In some cases, you can spread bet even when the underlying market is closed.

What is Spread Betting?

How does spread betting work?

When spread betting on the financial markets, you don't buy or sell the underlying instrument (for example a physical share or raw material). Instead, you place a bet on a derivative based on whether you expect the price to go up or down.

Short and long trading

If you expect it to rise, you might open a long (buy) position. But if you think it will fall in value, you could take a short (sell) position.

If the market moves in your chosen direction, you’ll turn a profit. But if it goes the other way, you’ll make a loss†. However, you can mitigate this with what’s called a stop-loss order.

Leverage

Spread betting is a leveraged product. This allows you to get full exposure to the market without having to pay the total underlying market cost upfront. Instead, you only need to deposit a percentage to open a position.

Margin

This percentage is known as a margin. Common margin rates for indices start at 5%. This means that you only have to deposit 5% of the instrument's full value to open a position. This is equivalent to a 20:1 leverage ratio. Trading with leverage magnifies your returns and losses, as they’re based on the full value of the trade.

If the price of the instrument you trade rises, the margin required will increase; if it falls, the margin will decrease. Should your open position start to incur losses not covered by the initial deposit, you’ll get a margin call notification. That means you’ll need to add funds to your trading account or risk your position being closed.

The exact margin rate varies depending on the market. It ranges from 3.34% of the trade size on forex to 20% for shares, shares baskets and ETFs. View our margin rates

Understand the key features of Spread betting

The three most important elements are the spread, the size of the bet, and how long you bet for. Here we look in turn at their spread betting meaning and key features.

What is the spread?

In trading, the difference between the buy (bid) price and sell (ask) price is referred to as the spread. This is where a broker's commission is made, as the buy price will be slightly higher and the sell price slightly lower than the underlying market price.

The spread is a key cost to consider. Depending on how expensive, volatile, and liquid an instrument is, the spread can fluctuate, along with its price and the trading volume.

Say for example, Apple is trading at a buy (bid) price of 141.10 and a sell (ask) price of 141.14, the spread would be 4.0. If your stake was £1 per point, you would pay £4 in spread.

What is the bet size?

Your bet size is the amount you buy or sell per point of movement in the instrument you’re trading. For example, £1 per point. This is also known as your stake size.

The minimum bet size – or stake – for indices, forex, and commodities is £0.10 per point. The bigger the stake, the greater your exposure to the instrument and market you're trading.

For every point that the price of the instrument moves in your favour, you will gain multiples of your stake times the number of points by which the instrument price has moved. On the other hand, you will lose multiples of your stake for every point the price moves against you.

What is the bet duration?

Many spread betting instruments don’t have a fixed duration and can be closed at any time during the instrument’s trading hours. At CMC Markets, we call these ‘cash’ instruments.

A key part of your spread betting trading strategy is managing your risk. Where you place your stop-loss and take-profit order levels, along with the volatility of the instrument you’re trading, will be important factors in determining the duration of your spread bet.

The type of trade is also a consideration. Spread bets on ‘cash’ instruments can normally‡ be kept open for as long as you want to hold them – please note there is a daily overnight holding cost.

Spread bets on ‘forward’ instruments have a set expiry date, usually within a few months, and there are no holding costs. Read more about futures and spread betting on forward instruments.

Spread betting trading example

As with all trading, it’s important to keep up to date with the latest economic data and news, because real-world events can often influence market prices.

As an example, let's take the FTSE 100 company Rio Tinto, which specialises in mining. You read that the company had recently made exploratory development in a promising new location. You decided to place a buy spread bet on the company at £10 per point. (For simplicity, we’ve not included overnight holding costs or stop-loss orders.)

In our example, the company is trading at 510 / 511 (where 510 is the sell price and 511 is the buy price). The spread is 1 point.

Scenario 1: Winning bet

Your prediction was correct and the stock rose to 580 / 581. You decide to close your buy bet by selling at 580 (the current sell price).

The price has moved 70 points (580 sell price - 510 initial buy price) in your favour. Multiply this by your stake of £10 to calculate your profit, which is £700.

Scenario 2: Losing bet

Unfortunately, your prediction was wrong – the yield from the new location proved disappointing and the price of Rio Tinto stock dropped over the next month to 440 / 441. You feel that the price is likely to continue dropping, so to limit your losses you decide to sell at 440 (the current sell price) to close the bet.

The price has moved 50 points (256 – 206) against you. Multiply this by your stake of £10 to calculate your loss, which is £500.

The price has moved 70 points (510 – 440) against you. Multiply this by your stake of £10 to calculate your loss, which is £700.

What are the advantages of spread betting?

Tax efficiency – in the UK, profits are tax-free*.

Choice – with CMC, UK and Ireland residents can spread bet on over 12,000 instruments – we have more forex pairs than any other major broker, and a huge range of indices, commodities, shares, ETF's and treasuries to choose from.

Opportunistic – spread bets are typically just for a few days or weeks, to take advantage of perceived short-term opportunities.

Flexibility – you can bet on a market rising or falling.

Leveraged – you only have to make a relatively small deposit.

Start spread betting with CMC Markets now

Considerations before you trade

Traders use different methods and strategies that suit their trading style. There are, however, some common tips to bear in mind:

Create a well-researched trading plan and stick to your strategy
Be aware of the macro environment, relevant economic data and company announcements
Test your ideas and strategies with virtual funds using a demo account
Effectively managing your risk can help you to cut any losses short, while letting winning trades run
Don't let emotions affect your trading strategy
Avoid recommendations and tips from unreliable sources, such as internet forums

Spread betting FAQs

What are the risks to consider?

Trading with leverage means any profit or loss you make is magnified. Financial markets can be volatile and major price changes happen overnight.

You risk losing the funds you’ve deposited, but as a retail client, you can’t lose more than the value of your account due to negative balance protection (this protection doesn’t apply to professional clients).

If your account balance is no longer sufficient to cover the margin required to keep your current positions open, your account might be subject to a close-out (liquidation). Learn more about liquidations and margin calls.

Always monitor your positions carefully, and use appropriate risk-management tools.

Is there a minimum deposit for spread betting?

There’s no minimum deposit amount to create an account with us. However, you won’t be able to place a trade until there are sufficient funds in your spread betting account to cover your margin. View our funding FAQs

What order types are available?

As well as market orders, which open or close a trade at the current market price, limit and stop-entry orders allow you to specify a price level at which you want to trigger a trade. You can apply stop-loss orders to specify the price at which your position will be closed out, if the market should move against you. You can also set up take-profit orders, specifying a predetermined target level to secure a profit from your trades. Learn about spread betting execution types

Can I hedge with spread bets?

You can offset potentially negative price movements by opening multiple positions on the same instrument. For details, see hedging strategies.

Can I spread bet without leverage?

Leverage is at the heart of spread betting – you can’t spread bet without it. But as part of your strategy, you might want to consider depositing more funds to cover more than the margin, and to limit your risk with a stop-loss order.

How do dividends affect spread betting positions?

If you spread bet on shares, any dividends are automatically reflected in your spread bet. If you’re long on a company that declares a dividend, we’ll credit your account accordingly. But if you’re short, you pay the dividend and your account will be debited accordingly.

What can I spread bet on?

You can spread bet on more than 12,000 instruments through our award-winning platform and app. Our most popular markets include: indices, such as the UK 100, Germany 30, and US NDAQ 100; forex, including EUR/USD and GBP/USD; and commodities, like gold and natural gas. You can also speculate on thousands of global shares, over 1,000 ETFs, treasuries, and our exclusive forex indices and share baskets

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Our spread betting account

• Practice being a spread betting trader with a demo account or start trading straight away with our spread betting account

The differences between spread betting and CFD trading

• Discover the tax and other differences between spread betting and contracts for difference (CFDs) – check out the differences between spread betting and CFD trading

More spread betting examples

• What might happen when you go long or short, win or lose? see more spread betting examples

How to spread bet using leverage

• Find out more about leverage ratios, formulas and products – see how to spread bet using leverage

*310,363 active clients, CMC Markets financial year 2021-2022. Active clients represent those individual clients who have traded with or held CFD or spread bet positions, or who traded on the stockbroking platform, on at least one occasion during the financial year.
**No.1 Web Platform, ForexBrokers.com Awards 2023; No.1 Most Currency Pairs, ForexBrokers.com Awards 2023; No.1 Platform Technology, ForexBrokers.com Awards 2022; Best Mobile Trading Platform, ADVFN International Financial Awards 2022.
^Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.
^†Associated costs with spread betting may affect your return.
^‡Except in some circumstances which may be outside of our control.