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Buying Shares
Share Price £10
100 shares
Total Investment £1000
Price rises: £11.00
Profit £100
Investment £1100
Spread Bet buy
£1 per point @ 1000
1 point = 1 penny
£1 equivalent to 100 shares just take off the two zeros.
Lean Guide To Spread Betting.
Introduction
One of the biggest advantages of spread betting is the flexibility it offers. Unlike buying shares, where you typically profit only if the price rises, spread betting allows you to speculate on both rising and falling markets. This makes it a useful tool not only for traders looking to profit from declining share prices, but also for investors who want to hedge an existing portfolio during periods of market uncertainty.
To help you understand the difference, we’ll first compare buying shares with placing a spread bet using a simple example. Then I’ll show you how I used spread betting to take a short position in SpaceX. Along the way, you’ll learn how profits and losses are calculated, how leverage works, and why risk management is essential.
Stocks vs Spread Betting
Person A – Buying Shares
Sarah believes ABC plc is undervalued and decides to buy the shares.
- Share price: £10.00
- She buys 100 shares
- Total investment: £1,000
If the share price rises to £11.00
The share price has increased by £1 per share.
- Profit = 100 shares × £1 = £100
- Her investment is now worth £1,100.
If the share price falls to £9.00
- Loss = 100 shares × £1 = £100
- Her investment is now worth £900.
Sarah owns the shares, so she can continue holding them if she believes they’ll recover over time.
Person B – Using a Spread Bet
John has the same market view but decides to use a spread bet instead.
Instead of buying the shares, he places a £1 per point spread bet.
Remember: For UK shares, 1 point = 1 penny (1p).
Also £1 a point – equivalent 100 shares, just take off the two zeros.
£2 a point – equivalent 200 shares.
If the share price rises from £10.00 to £11.00
The price has moved 100 points.
- Profit = 100 points × £1 = £100
If the share price falls from £10.00 to £9.00
The price has moved 100 points lower.
- Loss = 100 points × £1 = £100
Although John never owned the shares, his profit and loss are exactly the same as Sarah’s.
The main difference is that John didn’t have to pay the full £1,000 upfront. Instead, he only had to deposit a margin with his spread betting provider. This is known as leverage. While leverage allows you to control a larger position with less capital, it also means losses can build quickly if the market moves against you.
Let’s take a look using a stock called Knights Group (KGH) as an example and compare the spreads and costs if you intended to buy 100 shares priced at £1.14 or £1 a point if spread betting
The image below shows the market spread ( Sell 113.48 – Buy 114.5) if you buy the shares directly on an exchange. costing £114.5.
And, the next image is the stock traded with a daily funded spread bet. (more on this in the next section)
You can see that the spread in the second image is slightly wider, but not far off from the first image. This is because IG adds their own spread in addition to the market. You would only need to have funds of around £22.90 as margin compared to the full amount in your brokerage account.
Are There Other fees?
Yes, depending on the period
If you know that the intended trade is short term, you may want to use a Daily Funded Bet (DFB), this has a tighter spread but with an overnight holding charge, basically a cost for the margin.
This does get a bit technical, so I would suggest looking it up on the company website and taking the time to understand it, but, it is calculated on the sonia rate, trade per point, the spread, and nights held.
If you aim to hold the trade for longer, it may be cost-effective to use a 3, 6 or 9-month future expiration date, there is no daily charge as it is built into the spread and would have to be rolled over on expiry.
I prefer to use a DFB, and pay the charge as you may decide to get out quick, if the trade moves against you.
The above image details the cost involved buying KGH @ £1 point.
Pull Out The Stops
Another benefit of trading with a spread bet is the use of a stop-loss, which is a strategy I would recommend you use on all your trades, it allows you to plan and calculate exactly what you are willing to lose if the trade goes wrong,
successful trading is about cutting your losers and running your winners, and you can have many small losses and a couple of large winners and still be profitable.
As you can see in the image above in the stop distance box, I have set a stop, at 6.7 points… underneath shows the stop distance and potential loss in red. In this case, it’s £6.70.
Imagine that the share price rose by 40% to 158.2, and due to the spread you sold at @156.2, your profit would be £41.3 compared to a loss of £6.70, So, you can see how the above strategy makes sense!
There are two other types of stops you can use, A guaranteed stop and a trailing stop, the first stop guarantees that it will get you out at that price, if say a negative statement about KGH was released when the market was closed,
or a stock you have shorted gets bought…you would have peace of mind you would get out at your chosen price, and reduce any heavy losses.
Note, everything comes at a cost and you would pay a premium through a wider spread.
A trailing stop is exactly that, it trails behind your trade the exact amount of points you set, If you set your stop 10 points away and Knights Group increased by 20 points,
This would be a great position, as you would almost be guaranteed a profit. If the share price continues its uptrend, great, however, if the price starts to reverse, it will take you out 10 points from the reversal point at a nice profit.
A fantastic strategy and one I’ve used many times!
Shorting
The ability to short shares is one of the biggest advantages of spread betting. While many investors focus on finding companies they believe will increase in value, there are times when the opposite opportunity exists. A company may become significantly overvalued, its fundamentals may begin to weaken, or market sentiment may turn negative. In these situations, a short position can be another strategy to consider.
In the following example, I’ll show one of my own short trades in SpaceX. I believed the company’s valuation had become stretched, so I used a spread bet to take a short position. This real trade demonstrates how shorting works in practice, how profits and losses are calculated, and why managing risk is essential.
Note: This is just one of a few short positions I opened in SpaceX. Rather than committing all my capital at one price, I gradually built the position by adding smaller trades at different price levels as my conviction increased. This approach, known as scaling in or layering, can help reduce the risk of relying on a single entry price.
SpaceX short positions was entered at:
- Direction: Sell (Short)
- Entry Price: 19,410
- Current Price: 12,441*
- Stake: £0.04 per point
The share price has fallen:
19,410 − 12,441 = 6,969 points
Current unrealised profit:
6,969 × £0.04 = £278.76
*Price at the time of writing.
I can now move my stop loss to a set position or as mentioned a trailing stop to catch a higher profit on the reversal.
An extention of the ISA
What do I mean by this? well If you are lucky enough to add the maximum amount to your ISA every year , then lucky you, but be prepared to pay capital gains on anything you have outside of that, The answer… is to trade with your spread betting account.
You pretty much get the same benefits as if you owned the shares, the only difference is how it is funded, be sensible… If you have an extra £10000 to invest, then only buy shares up to that amount, or use a portion and put restrictions in place to minimise losses.
Don’t be tempted to trade on huge margins.
Who Spread Betting Might Not Be For!
There is a thin line between investing and gambling, especially with spread betting, and if you see yourself as a bit of a gambler, or have a gamblers mentality I would probably leave well alone.
As mentioned, it is a leveraged product and you’re essentially being given access to funds on loan, which can result in over trading, and heavy losses.
In Conclusion
If used correctly and with an investing mindset spreadbetting can be used as a great alternative to buying shares, protecting your funds in a meltdown, and utilise shorting opportunities.
If you are considering the use of spread betting…Plan every trade, use stop losses, and be sure not to trade on too much margin.
Good Luck!
