What is spread betting?
Spread betting is a way of making a profit from the price action of an asset, like a share, an index (such as the FTSE 100), or even a cryptocurrency like Bitcoin without ever owning the asset. Financial spread betting carries a high level of risk, although this can be mitigated slightly through the use of a stop loss.
Whenever you buy or sell a financial security, you will sell at above or below the market price. If you are buying, you will pay above the market price. If you are selling, you will receive less than the market price. Spread betting aims to generate an active market in both sides of a binary wager.
The difference between the two underlying values behind market price, known as the ‘bid’ and ‘offer’ is known as the ‘bid/offer spread’. Spread betting is speculating on whether the price of an asset will move above or below this spread.
Example of spread betting
For example, a spread betting provider could quote a bid of £100 and an offer of £105 for shares in Incognito, Inc. If you believe the stock will fall, you could bet £5 for every pound that Incognito falls below £100. If after a week Incognito had fallen to £90 a share, you would pocket £50 from your bet. However, if Incognito had risen to £115 you would lose £75.
Spread betting is altogether different from fixed odds betting, as the amount of money that can be gained or lost is not set in stone from the outset. This makes it a very risky endeavour, and very attractive to speculators.
Category: Financial Glossary