Financial spread betting refers to the practice of spread betting being applied to financial markets, rather than to, say, sporting events. Essentially, financials spread betting in the United Kingdom works in much the same way as futures and options markets, with a few key differences. These differences include the fact that the charge happens through a bid offer spread that is wider than in futures and options, and that the spread’s tax regime in financial spread betting is different than that in options and futures. Spread betting is also more flexible than futures, as it is not limited to particular hours for exchange and definition, and thus can create new instruments easier (such as individual stock futures). Spread betting may also have guaranteed stop losses.
Part of the reason financial spread betting has these important differences from other types of trading, such as futures and options, is that it is off-exchange, meaning the contract for the spreads exists directly between the client and the market maker. This stands in contrast to exchange cleared market relationships, which have higher levels of regulation. However, the companies that make spread betting markets are some of the most highly regulated entities in the United Kingdom.
Financial spread betting differs from fixed odds betting in that there is not, necessarily, any predetermined amount of money that can be won or lost. Most people creating spread bets will negotiate with a bookmaker in order to create a stop loss, or a stop. A stop loss is a point at which, after the spread has moved against the bettor’s favour by a sufficient margin, the bet is closed to prevent further losses. Some people also take out stop wins, also known as limits or “take profits,” which work the same way but in the opposite direction. This is designed so that the bettor will be able to take their winnings before the spread has the potential to reverse direction and make them start losing.
Today, financial spread betting covers a huge variety of markets, from the traditional markets like share, bonds, and derivatives, to things like housing prices. Due to a fluctuating and often falling stock market, financial spread betting is used to hedge against predicted losses in a share portfolio. Another reason financial spread betting is becoming popular is that it is currently free of capital gains tax, regardless of the personal circumstances of the given trader. In some cases, such as when the trader can demonstrate that they have another income on which they support themselves, financial spread betting can also be free of income tax. If a trader supports himself or herself solely on financial spread betting, then the winnings are subject to income tax.
