How does Spread Betting Work?

All spread betting is based on the same principle. The company will make a prediction as to the future result of an event in the form of high and low estimates. The gap between these two figures is the 'spread’ (see below).

You bet according to your judgement either by 'buying' at the top end of our spread or 'selling' at the low end. You buy if you think the result will be higher than our spread and sell if you think it will be lower. Profits and losses equal your stake multiplied by the difference between the result / closing level* and the original level at which you struck your bet.

Both financial and sports spread betting are currently free from all UK taxes, including Capital Gains Tax *. Generally there are no dealing charges other than the spread, but it is advisable to clarify such matters with the company in question prior to trading.

*  Tax laws can, of course, change.

What is a spread?

A spread is the difference between the price the company will sell to you, and the price they will buy from you.   As an example, a typical spread on the FTSE (near quarter) future contract may be quoted as 6510 to 6520 representing a ten-point spread. You would “sell” (go short / ‘down bet’) at 6510 or “buy” (go long / ‘up bet’) at 6520.

What is Notional Trading Requirement (NTR)?

NTR is a risk figure applied to each individual market quoted and which the company considers as being a fair reflection of the potential daily volatility applicable to the market/share in question.

It is therefore imperative that, prior to dealing, you familiarise yourself with the levels of NTR applied when you are considering what is the suitable size of your stake.

How do I place a Trade?

This can be done at the telephone with instant execution effected, some companies even offer on-line trading facilities. It should be noted that security reasons all calls are recorded and retained by the company. 

What is a margin?

Margin (Additional Funds) Are Usually Required When:

Clients, who hold open positions, exceed their credit allocation or initial deposit because of: 

1: Open position losses marked to market.

2: Realised losses.

3: Excess Notional Trading Requirement (NTR).

4: Or any combination of the above three.

The amount of margin required is normally the total of the above factors minus the amount deposited or the credit allocation. Margin rules can differ from company to company so you must ensure that you familiarise yourself with the rules prior to trading.

Accounts Questions

What is a Deposit Account?

A deposit account is one where you will not normally be expected to provide proof of funds before opening but you will be required to deposit funds into the account before trading.  The amount that you deposit will determine the total size of any trade/trades permitted on the account and will not be considered as your ultimate financial liability.

What is a Credit Account?

A credit account is one where the company will, subject to the size of trade (see NTR above), normally allow the client, to trade on account without the need to deposit funds prior to trading.  This does not constitute a credit facility nor is it to be considered as a limit to your losses but is simply a risk allocation figure against which you may trade and if exceeded entitles the company to make margin calls (see above).

When positions have been closed and a deficit cash balance occurs, the balance is normally due within five business days of the statement date. Realized losses are due regardless of open positions that may be in profit. Realized losses are included in margin calculations and if losses accumulate to place the account on margin, funds are then required as per margin terms and normally due prior to further trading.

In the case of clients who are granted a credit allocation, companies will have requested and obtained proof of funds in a multiple of the credit allocation requested by the client.  When the company is satisfied as to the client's financial standing, it may establish the client's credit allocation and also waive the need for the client to maintain NTR (see below for an explanation of NTR) normally in an equivalent size to the credit allocation granted. 

How do I apply for a Credit account?

Companies will normally require evidence of liquid risk capital in a multiple of your requested credit allocation.

What represents evidence of liquid risk capital?

This will normally be required in the form of brokers valuation of a share portfolio, a bank / building society statement that covers at least one full month with adequate funds for the duration, PEP or ISA statement etc.  Companies can of course reference your bank direct and pay any fee that is applicable, however, due to the Bankers Charter, you will, prior to their inquiry, be required to provide your bankers with authority to respond.

When can I expect to receive my winnings?

With the exception of Deposit accounts and those who prefer to be classed as “pay on request” companies normally pay Clients any available realized profits on a weekly basis. Payments will normally be made by cheque or by means of an electronic funds transfer with prior notice.

Can you send my money to a third party such as my spouse?

Companies will not normally send any money to any person other than the Client.  Refunds by electronic funds transfer will normally only be made to the same card that the funds were deposited from.  Many individuals have bank accounts specifically set up for the purposes of spread betting and use this account card only to fund their accounts.

Can I hold Long and Short Positions in the same market?

Some companies operate a first in first out basis. You can, however, hold a long position in the near quarter and a short position in the far quarter of a market or vice versa.

How does equity / share trading work?

Exactly the same as trading indices. You can buy or sell the price of a share. It should be noted you are not actually buying the share but simply trading on the movement of the price and therefore you will not be entitled to any dividend payments.

Can I roll my Financial or Single Stock positions from one contract month to the next?

Most companies offer this facility however you should check with them first as to what charge is applicable for such a service. Normally your open positions (excluding Options that cannot be rolled) become eligible for roll over into the next contract period, within a short period of expiry of the existing contract.  You can choose to roll the positions but you will normally be required to contact the company by telephone in order to do so. 

It should be noted that by executing a roll over, the original bet is normally closed at mid-market level and becomes due for settlement and a new bet is established.

What is a stop loss?

Most companies offer the facility to place limit, stop or other orders at levels and on terms acceptable to them. There are many forms of stop loss and they can be left good for the day or good until cancelled etc. It is therefore imperative to clarify exactly what the terms of your stop / order is when placing such an instruction.

Options.  What are they and how do they work?

An option is the right but not the obligation to buy or sell a given market at a fixed price (called the ‘strike price’) at some fixed point in the future (the ‘expiry date’).  The right to buy is known as a ‘Call Option’ and the right to sell is known as a ‘Put Option’.

These contracts have prices which are typically a small fraction of the price of the underlying.  For example, with the FTSE index at 6750 in mid September a Call option with a strike of 6900 expiring in December might have a value of 150.

The value of an option comes essentially from two components.  The first is how valuable the option is already (known as the ‘intrinsic value’) and the second component comes from the likelihood of the options value increasing with market movements over its life (known as the ‘time value’).  On the expiry date of an option there will be no time value left, and the options value is all intrinsic.  (Note that because an option is a right but not an obligation its value can never be negative).

A customer may buy or sell options.  Buying options is often a good way to take a view on a market whilst having only a limited risk, as the maximum possible loss is the price paid for the option. Selling options is however a much riskier proposition as by selling them, you are accepting a limited possible profit (the price you sold at) whilst having potentially unlimited losses.  Once you have bought or sold the option of your choice you are free to run that option to expiry, or to trade out of the position at any time.

This may seem complicated but a few examples should make things clearer.

Example A:            Buying a Call Option

In September with the FTSE at 6550, the company quotes the Dec 6700 Call as 150 - 160.  (This option expires on the 3^rd Friday in December and will settle at the difference between the level of the index on that date and 6700, or at zero if the index is below 6700).  You buy £5 per tick at 160.

Outcome 1            and the index rises to 6924 on expiry date.

Outcome 2    and the index is below 6700 on expiry date.  Your option has a settlement value of zero. You therefore lose £5 x 160 (price paid) = £800 loss.  (Note: it doesn’t matter how far the index is below 6700, your loss is the same).

Example B:            Selling Call Options

In September with the FTSE at 6550 the company quotes a price for the Dec 6700 Call of 150 – 160. (This option expires on the 3^rd Friday in December and will settle at the difference of the index on that date and 6700, or zero if the market is below 6700).  You sell £5 per tick at 150.

Outcome 1            and the index is below 6700 on the expiry date.  Your option has a settlement value of zero.  You therefore make £5 x 150 (price received) = £750 profit.  (Note: it doesn’t matter how far the index is below 6700, your profit is the same).

Outcome 2            and the index rises to 7220 on the expiry date.

Example C:            Buying Put Options

In September with the FTSE standing at 6550 the company quotes a price for the Dec 5925 Put of 45 – 52. (This option expires on the 3^rd Friday in December and will settle at the difference between 5925 and the level of the index on that date, or zero if the index is above 5925).  You buy £25 per tick at 52.

Outcome 1            and the index falls to 5609 on the expiry date.

Outcome 2            and the index is above 5925 on the expiry date.  Your option has a settlement value of zero. You therefore lose £25 x 52 (price paid) = £1300 loss.  (Note: it doesn’t matter how far the index is above 5925, your loss is the same ).

Example D:            Selling Put Options

In September with the FTSE standing at 6550, the company quotes a price for the Dec 5925 Put of 45 - 52. (This option expires on the 3^rd Friday in December and will settle at the difference between 5925 and the level of the index on that date, or zero if the index is above 5925)  You sell £25 per tick at 45.

Outcome 1            and the index is above 5925 on the expiry date.  Your option has a settled value of zero. You therefore make £25 x 45 (price sold) = £1,125 profit.   (Note: it doesn’t matter how far the index is above 5925, your profit is the same).

Outcome 2            and the index falls to 5728 on the expiry date.