How Does Spread Betting Work – and What’s the Contrast with Share Trading?

By  //  April 21, 2021

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Anybody who has spent some time in the online trading world is likely to have stumbled over the term “spread.” It’s a key term in the world of markets and refers, at its most basic level, to the difference between the price at which an asset is bought and the price at which it is sold.

But add on another word, “betting,” and the picture becomes different. “Spread betting” is a practice all of its own, and it stands in contrast to “traditional” investment methods like share dealing. This article will explore what spread betting is and then will explore the differences between the two types of trading practice.

What is spread betting?

Spread betting is a form of share trading in which the trader attempts to profit on the change in an asset’s price. This takes the precise form of the word “spread” in the name: the spread is the difference in price between the cost to purchase and the price when sold. When trading, the broker will provide an offered buy price and sell price – and it’s up to you as the trader to decide whether these prices are suitable for your budget and requirements.

If they are, you can go ahead and open a position – and usually, you won’t have to pay any commission, either, as a proportionate fee is deducted from the spread by the broker at the point the position is opened. Spread betting isn’t for everyone, but benefits like these make it worth a try – and curated lists of beginners’ spread betting platforms from advice services like AskTraders are good places to start.

Is it different from “normal” trading?

The first point to make here is that there’s no such thing as “normal” trading. The term “trading” is an umbrella one: from day trading to scalping, there are all sorts of ways to make money in this field. What most people think of when they hear of “normal” trading, though, is the kind of traditional long-term share investments that are made on stock markets and other similar exchanges.

In some ways, spread betting might look like conventional investing: the trader takes a view of how an asset will move and then aims to benefit from it by speculating with a financial commitment. But there are some subtle differences that are important to look out for.

Spread betting has, in some ways, opened up the financial markets to all sorts of positions. In the past, it was only possible to speculate in one “direction.” Purchasing a share requires a commitment to thinking it will rise in value.

But spread betting allows more complex positions to be taken. You can, for example, “bet” that the asset will go down in value – so the range of potential positions is much broader, and you face no technical barriers to customizing your portfolio.

The above aspect of spread betting is linked to the nature of the asset being purchased when a spread bettor invests. In a “normal” investment scenario involving purchasing an asset like a share, ownership of the actual asset is given when the speculator opens the position.

This brings some benefits, such as the right to derive a share of dividends if they are paid – and, in some cases, potentially even some power over the direction of the company. But buying shares can be a complex business, and it’s far from instantaneous.

In a spread betting scenario, the trader isn’t buying a share. They are usually buying an instrument that is derived from a share, known as a derivative. This doesn’t entitle them to dividends or control, but given that derivatives are not always as scarce, it might make it a lot easier to invest. In many cases, derivatives can be purchased in just seconds.

Spread betting, then, is best understood as one of many different types of trading. It’s a variety of trading that is only suitable for some traders, such as those looking to pursue short-term profits without actually owning the asset itself.

For those who are in the investment world for the long haul, spread betting might not be right. But those who are looking to experiment or pick up potential profit “quick wins,” perhaps fueled by leverage from the broker, could find spread betting to be what they need.