How spread betting works

Tim Bennett talks through a practical example of a spread betting trade, and explains how it works.

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Spread betting

Spread betting is a straightforward and tax-efficient way of leveraging the financial markets. The spread-betting company predicts where a price or score of anything from a share to a commodity to a cricket game will stand at a specified time in the future. The prediction takes the form of a spread – the range between the low and high estimates. You then bet on those prices, ‘buying’ at the high price if you think the price will rise from current levels and ‘selling’ at the low price if you believe it will fall. Spread-betting profits count as gambling wins, so aren’t liable for capital gains tax, but spread-betting losses – which can be high – cannot be set against other gains to reduce tax.

• Entry from MoneyWeek’s Financial glossary.

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  • Martin

    Whereas investing on fundamentals is not entirely random, short-term fluctuations in stock market prices effectively are. Mathematically therefore (unless in possession of inside information) losses must in the long run on average equal gains. Given the way that stock market price movements are distributed on a Cauchy rather than a Gaussian distribution (see Mandelbrot ‘The Misbehaviour of Markets’) there may be quite a few long term winners. But who they are will be random and will be matched by others’ losses. This is a zero-sum game except to the broker.

  • Debi

    This short lesson has been so enlightening! I have for months
    thought I would spread bet but will stick to buying shares.
    Someone needs to change the rules regarding owning shares instead of encouraging this type of a gamble.