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Lean Guide To Spread Betting.
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 Spreadbetting
The cards below show how a spreadbet differs from buying and owning shares directly. On the left you can see an example and outcome if you bought the shares via your broker on an exchange if the price had
increased by 10%, and on the right if you used a spreadbet. The difference is you do not own the shares and would only need a percentage of the full amount needed in your acoount normally around 20%.
Buying Shares
Share Price £10
100 shares
Investment £1000
Price Rises: £11.00
Profit £100
Total Investment
£1100
Spread Bet buy
£1 per point @ 1000 points: 1 point = 1 penny.
£1 equivalent to buying 100 shares just take off the two zeros.
Price Rises: £11.00
£1 x 100 points
Profit: £100.00
Total Investment
£1100
Let’s now look at a real example if you were to buy the shares outright and then using a spread bet with a stock called Knights Group (KGH) buying 100 shares priced at £1.14 or £1 a point.
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. plus any commission.
And, the next image is the stock using a spread bet.
You can see that the spread in the second image is slightly wider, This is because IG adds their own spread in addition to the market, which is essentially how they create revenue. You would also 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 (charges you daily for the leverage), 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 receives a bid, you would have peace of mind to exit at your chosen price, and reduce 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 an example of 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. This approach, known as scaling in or layering, can help reduce the risk of relying on a single entry price. I then lowered my stop loss to lock in profits, after the stock suddenly rallied.
Example of the first short position in Spacex
- Direction: Sell (Short)
- Entry Price: 19,410
- Closing Position 11500
- Stake: £0.03 per point
19410 – 11500: 0.03 X 7910 = Profit – £237.30
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, 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 £10,000 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.
Conclusion
If used correctly and with an investing mindset spread betting can be used as a great alternative to buying shares, protecting your funds in a meltdown, and utilise shorting opportunities.
If you are considering spread betting…plan every trade, use stop losses, and be sure not to trade on too much margin.
Good Luck.
The Lean Trader.
(Disclaimer: This post is for education purposes only and not in any way a recommendation or financial advice, DYOR and use at your own risk.)
