How to spread betting companies make money
By This Is Money Updated: Spread betting is high risk. Unlike more traditional gambling where you only lose your stake money, profits and losses are potentially unlimited. The scope is enormous. You can bet on anything from sports to politics to financial markets to house prices.
How do Spread Betting Companies make money?
Rule number one is only get involved if you understand exactly what you are doing. Spread bookmakers are regulated by the Financial Services Authority in the same way as any other company which sells financial services to the public, but they do not mitigate for investor ignorance. Say an election is approaching and you have a feeling that the Conservatives will do better than either the opinion polls or the bookmakers suggest.
Lets say a spread bookmaker is quoting the Tories to win seats. Punters can either make a 'down-bet' from or an 'up-bet' fromdepending on their view.
You choose the latter. If the General Election leaves the Conservatives with exactly seats, your bet ends up all square. The other key feature of spread betting is that trades can be closed at any time, and do not have to be left to expire. In our example, it could be that a very encouraging opinion poll for the Tories during the campaign caused the bookmaker to raise its spread on Conservative seats fromto You would then face a choice — either stick with the bet probably until election night, or close it early, atthe bottom of the new spread.
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Spread betting on politics and sport is gambling, pure and simple. Spread betting on finance however can be many other things — it is a tax-free way of day-trading shares, or of making short-term investments for a few weeks or months, or even of hedging exposures in an individual's personal finances.
The benefits are clear. Share trading incurs 0. You are also liable to capital gains tax on profits that exceed your annual allowance. Making an 'up-bet' on a share via spread betting produces the same exposure as buying the shares in the ordinary way, but there is no stamp duty and no stockbrokers' commission. Bookmakers clearly have costs, and those are included in the spread, which will therefore be a bit wider than the gap between the bid price and offer price on a share that you could buy through your stockbroker.
However, the real advantage of spread betting is that you can go 'short' on a stock - make money if the price falls. The ability to cash in on the decline of stocks and indices such as the FTSE has enabled many spread betting traders to make profits even during the miserable stock market periods.
Several people have made millions of pounds in profit from spread betting in the product's year history. The biggest individual losses tend to be smaller, since bookmakers will step in to close a bet if they feel that the individual may struggle to meet the losses. When you make a financial spread bet, you do not have to pay cash up-front to cover your whole exposure.
To prevent losses on a bet exceeding a certain amount, traders can arrange a 'guaranteed stop' with their bookmaker. This automatically closes the bet down if the spread touches a certain level. The ability to shut down a spread bet before its expiry date. The closing level will be the bottom of the new spread for an 'up-bet' or the top of the new spread for a 'down-bet'.
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