Forex Platforms

What is Financial Spread Betting?

One of the areas of making money off the financial markets is spread betting. Financial spread betting is a method of earning returns that requires speculation on the movements of financial markets and individual financial instruments. Financial spread betting is not permitted in the U.S., but it is available in the United Kingdom, where it is popular due to its exemption from capital gains taxes.

When you place a spread bet, you are essentially placing a wager. There is an active market on both sides of the spread bet, allowing for you to short the market or financial instrument. (Shorting is betting that it will lose in value.) A point spread is used to put both sides of the wager on a somewhat even footing. The difference between the bid and offer prices represents the spread. This is usually set by the spread betting company. You do not own or trade the underlying financial instrument; rather, you simple speculate on price movements.

Here is an example of how spread betting might work with a stock:

Company A has a price of $92. The spread betting company offers a quote of $90. You can place a spread bet of $3 for every dollar that the price moves below $90. After five days, you see that the price of Company A has dropped to $85. You have gained $15 ($3 multiplied by the five points the stock price fell below $90). The flip side, though, is that you lose if the Company A’s stock price increases. If it rises to $98, you lose $24 dollars — $3 for each dollar above $90.

Financial spread betting is possible with more than individual stocks. It is possible to place spread bets on stock indexes and even place performance bets on the likelihood of an event (such as the cost for the NYSE and EuroNext merger). Spread betting is possible on the commodities market, forex market and bond market. Indeed, any financial instrument or index can be used for spread betting.

It is important to remember that placing a spread bet can be risky. Financial markets are volatile, and if you are wrong, you stand to lose a great deal of money.

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