Spread betting is an interesting financial product you might have heard about. Part investment, part gambling, spread betting isn’t the kind of activity you’ll be centering your portfolio upon. However, if you have a good understanding of market behavior, chances are you can make some money, once you understand how it works. We’ll walk to through the basics and help you get a sense of whether or not you want to take a stab at this fun, exciting, and risky financial activity.
Spread betting is the place to test the intuition of your “financial gut”. If, for instance, you expect the Dollar to take a dive relative to the Yen, or if you think the S&P will take a sudden soar at 6:48 PM on a Tuesday, you can bet on it here. Maybe you just want to test the mettle of some oracle or other. Here are the nuts and bolts of how you’ll do it.
You pick an asset and wager money on whether it will rise or fall. It’s as simple as that. These assets are diverse, including markets, stocks, housing prices, the list goes on and on. You are not actually buying the thing you’re bidding on, you’re just putting money on its behavior relative to a specific period of time.
For any given asset, you’ll be provided a quote. This quote is two figures: one called a “bid”, the other an “offer”. These differ in this way. If you think that, for instance, the S&P is going to rise this afternoon, from its level at 1948, then you’d buy an “offer” at, perhaps, $10/point. For every point the S&P rises, within a specific timeframe, you’ll make $10. 20 points? $200! Likewise, if you think it’s going to drop, you’d buy a “bid”. Bids and Offers are always a point or two higher/lower than the current price, so there’s a chance that your chosen asset could rise, but not enough to cross the set threshold for payout. This is somewhat rare, though.
Here’s the downside. Spread Betting also works in reverse. If you are betting $10/point that your market will rise, you’ll lose $10/point if it falls as well. If it falls 10 points, you’re out $100. Because things can quickly get out of hand, a betting firm will demand a margin, some portion of your original bet that you deposit up front to guarantee that you’ll pay up if you lose a lot. If your potential losses exceed such-and-such an amount, you’ll have to increase your margin or get booted.
It is possible to take spread betting to more sophisticated levels, with more controlled risk, but this is outside the focus of this article. While still not permitted in the US, UK winnings at spread betting are tax free. This is possibly the biggest impetus to motivate spread betters to take a shot. Good instincts could pay out bigger winnings than would be returned from more conservative types of investment, and tax-free to boot.