Back in the 1940s, American maths teacher Charles K. McNeil came up with the idea of spread betting on football games, and the landscape of sports gambling in the country was changed forever. Eighty years later, the concept has endured and has even been adapted to suit the financial markets.

When you’re placing a stake on the outcome of a sporting fixture, you’re taking a risk of incurring a loss, and that’s certainly no different when it comes to financial spread betting. Of course, you also stand to make a profit, which is why it’s something that appeals to so many people.

However, it’s believed that around 80% of spread bettors lose money and a survey from the Financial Conduct Authority found evidence to back up that claim. 

So, if you’re thinking about becoming involved in financial spread betting it’s absolutely vital that you do your homework before you begin to execute any trades. Here’s a short explainer to help you get started.

What is spread betting and how does it work?

A key difference between spread betting and trading stocks or shares is that with the former, you never own the underlying asset. Essentially, what you are doing is making a prediction and speculation on whether the price of an asset is going to rise or fall. Depending on which way you think the market will move, you choose to buy or sell. If you think the value will increase, you buy, and if you think it will decrease, you sell. The difference between the buy and the sell price is known as the spread.

Spread betting is sometimes confused with contract for difference (CFD) trading, but with CFDs you are usually required to pay capital gains tax on any profits you make. With spread betting, this is typically not the case.

An example of spread betting

Let’s assume a single share in a company is worth £1.50. You believe its value is going to go up and you are quoted a spread of £1.50 / £1.53. This 3p difference is referred to as three points. You want to buy, so you open up a position of £2 per point. You then see the asset’s worth increase to £1.60, which means you’ve made a profit of 7 points, or £14.

But of course, things can also turn against you. Let’s assume the same share price and your same speculation of £2 per point. Now let’s say things don’t turn out how you’d anticipated and the asset’s value falls to £1.43. That’s 10 points below the buy price you were quoted in the spread, so in this instance you’ve lost £20.