What is spread betting?
A flexible and cost-efficient way to trade the markets
Financial spread betting is a way of trading on the price movement of a financial market or instrument, i.e. whether it will go up or down in value, without the hassles, costs and limitations associated with physical ownership.
With CMC Markets you can trade on a wide range of instruments, from commodities, such as gold or oil, to indices like the UK 100 or US 30. You can also trade on forex (foreign exchange), where you take a position on whether one currency in a pair will strengthen or weaken against the other. You can also trade on equities, which are company shares – it’s completely up to you. Choose from over 3000 commodities, indices, currency pairs and companies.
When you spread bet on whether the price of a financial instrument will go up or down in value, for every point an instrument moves in your favour, you gain multiples of your stake. For every point it moves against you, you lose multiples of your stake.
If you think that a certain financial market will rise in value, then you ‘buy’ the product with the aim of selling it back at a higher price. This is known as ‘going long’. If you think that a financial market will fall in value, then you ‘sell’ first and aim to buy it back later at a cheaper price. This is known as ‘going short’.
Some of the benefits of spread betting
The ability to ‘go short’ is one of the main benefits when comparing spread betting against traditional ownership. A major benefit of spread betting is that profits are tax free, depending on your personal tax status, so unlike share trading, you can avoid capital gains tax.
Buying in a rising financial market
If you buy a financial instrument that you believe will rise in value and your prediction is correct, you can sell the instrument for a profit. Spread betting is not without its risks though, and if you are incorrect and the value falls, you make a loss which could exceed the initial amount you deposited.
Selling in a falling financial market
If you sell a financial instrument that you believe will fall in value and your prediction is correct, you can buy the instrument back at a lower price, for a profit. (If you are incorrect and the value rises, you make a loss which could exceed the initial amount you deposited.)
Trading on margin
Spread betting is a leveraged product, which means that you are only required to deposit a fraction of the overall value of the trade. This fractional amount is referred to as margin. Typically, margins with CMC Markets vary between 0.25% and 20%, which is the percentage of the whole position value that you would normally have to fund yourself. The rest of the funds for the position are put forward by CMC Markets. Margin enables you to amplify your return on investment. However, losses will also be amplified, so margin trading is not necessarily for everyone and you should ensure you understand the risks involved.
Is spread betting risky?
Investing in any type of financial product, be it shares or forex, carries a level of risk as you could end up with less than you started. Spread betting is the same. When you trade on margin you are making use of ‘leverage’, which can amplify your profit. But, it can also amplify your losses, so you could end up losing more than your initial stake or deposit.
We offer a number of risk management features, such as stop losses that allow you to set a level where you are not prepared to risk any more of your capital on a position. If the market moves against you and the price reaches this level, the position is closed. Our automatic stop loss feature sets a stop loss for you on each trade.
It’s important that you understand how to use the risk management tools available to you, so you can reduce losses and maximise profits. Read the risk management sections to learn how our tools work.