What is Spread Betting?
How Spread Betting Works
How Spread Betting Works A standard bet sees the gambler staking money on the outcome of an event. They might bet on a horse to win a race, or two football teams to draw. The result of the event will determine whether the bet wins or loses.
Spread betting is different in that success or failure is determined by the accuracy of a prediction, rather than a simple ‘win or lose’ result. A spread represents a range of possible outcomes and you bet on whether you think that the result will be above or below the spread.
The more accurate your prediction, the more you can win. So if you think that the spread is too low and bet on it being higher, the more accurate that assumption, the more you will be rewarded.
If your bet is unsuccessful, the opposite applies. The less accurate your prediction proves, then the more money you will lose. Spread betting can come with a high level of risk, but offers potentially great rewards.
Origins of Spread Betting
The concept of spread betting was invented by Charles McNeil. A former mathematics teacher, McNeil became a securities analyst and then a bookmaker in Chicago in the 1940s. Despite its American conception, spread betting is not available in the United States, where such forms of gambling are illegal.
Unlike the traditional betting markets, which are predominantly focused on sporting events, spread betting is most popular amongst those wishing to trade on financial markets. Financial spread betting first found popularity in the mid-70s, as investors were given the opportunity to spread bet on gold markets, which at the time would have been prohibitively expensive for most individuals to actually buy or sell.
Advantages of Spread Betting
One of the advantages of spread betting on financial markets is that you don’t own the assets that are being speculated upon. A benefit of non-ownership is that any profits will not be taxed. As the investor is merely betting on movement within a financial market, spread betting is a form of gambling and is taxed as such. In the UK, any gambling wins are exempt from taxation.
Another perk is the financial flexibility that spread betting provides. Whereas real financial trading can often require a significant financial outlay, spread betting allows the investor to utilise leverage to take on significant market exposure, with an actual amount that is just a small percentage of that figure.
So if you employed a leverage of 200:1, for example, you would need to deposit just 0.5% of the total exposure that you wished to gain in the market. Of course, if the market goes in the opposite direction than the investor predicted, they stand to lose money by the same ratio. However, stop limits can be set up to ensure that the position is closed out automatically, which can help to minimize losses
With spread betting available on thousands of financial markets, including indices, shares, currencies and commodities, it is a viable option for all levels of investors.