How Does Spread Betting Work?
Today spread betting is one of the most popular types of betting. When making a regular bet, the amount you can win or lose is fixed as soon as you make the bet. With spread betting, however, the profit or loss changes depending on how much you win or lose the bet by.
There are two distinct spread betting options – financial and sports. Regardless of the bets and the types of market involved, the basic principle of spread betting remains the same. It fundamentally involves betting on the outcome of a game or the price movement of a security.
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So, how does spread betting work? Based on their estimation of the result of a sports event or the future prospects of an index or a share, a spread is quoted by the spread betting company. Based on your assessment, you can bet on rise or fall in the price or win or loss of a particular team. The following examples will help you better understand what goes into sports betting.
Sports Spread Betting
A very popular sports spread betting market would be the ‘total free kicks’ market in football. Here, bettors speculate on the number of free kicks likely to be awarded during the course of a game. Imagine for example that Arsenal is playing against Southampton and the free kicks quote is 10-11. This means that the spread betting firm expects there to be 10 to 11 free kicks in the game.
Selling: If you believe that the number of free kicks will be less than 10, you can sell bet 20 pounds per point at 10. If you are right and the final number of free kicks is 7 i.e. 3 less than 10, you will earn ₤20 x 3 = ₤60. On the other hand, if you are wrong and the number of free kicks is 13 i.e. 3 more than 10, you will lose ₤20 x 3 = ₤60.
Buying: Buy transactions resemble sell transactions, but they are made at the higher end of the spread. If you think that the number of free kicks will be more than 11, you can buy bet 20 pounds per point at 11. If your prediction is correct and the final number of free kicks is 14 i.e. 3 more than 11, you will win ₤20 x 3 = ₤60. If your estimate is incorrect and the final number of kickbacks is 3 less than 11 i.e. 8, you will end up losing ₤20 x 3 = ₤60.
Financial Spread Betting
The basic principles in financial spread betting are same as those in sports spread betting. Consider than currently Vodafone is trading at 120-120.5.
Selling: If you believe than the price is likely to move downwards, you can place a sell bet worth ₤10 a point at 120. If your prediction is correct and the price moves down to 115-115.5, you will make a profit of ₤10 x 4.5 = ₤45. But if the price moves up to 125-125.5, you will lose ₤10 x 5.5 = ₤55.
Buying: Similarly, if you believe that the price is likely to rise, you can place a buy bet worth ₤10 a point at 120.5. If the price moves up to 125-125.5, you will make a profit of ₤10 x 4.5 = ₤45, but if the price moves down to 115-115.5, you will lose ₤10 x 5.5 = ₤55.
Advantages of Spread Betting
Spread betting offers a number of advantages over other forms of betting making it a much more attractive option. Some of the key benefits of spread betting include:
Flexibility: Spread betting allows you to profit regardless of whether the market is falling or rising. The ability to go long or short with equal ease is one of the main advantages of spread betting.
No broker fee or commission: Spreads are the main source of income for spread betting companies. This means that you need not pay any additional brokerage or commission on trades.
No tax: In the UK, one of the biggest benefits of spread betting is that bettors are not required to pay income and capital gains tax on the profits. Moreover, spread betting only involves taking a position on the movement of the market, not buying the underlying assets. This means no stamp duty. No tax and zero commission can together result in considerable savings.
Risks of Spread Betting
While spread betting offers many benefits, it also involves a greater amount of risk than conventional fixed odds betting. If you’re not careful and a result occurs that’s very far from the spread, you stand to win or lose a fortune, and even if you don’t have enough money in your account to cover your losses, you’ll be liable to repay the company.
It is possible however to control the risks with tools like limit order, stop loss order and controlled risk bet, which all work to set a maximum on the amount you can win or lose, and let you ‘trade out’ of your bet at any point. Overall, spread betting represents a great opportunity for talented sports bettors to make a good profit, but must be approached carefully