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Spread Betting Basics for Beginners

What Is Spread Betting? Spread betting is the practise of speculating on the direction of a financial market without actually owning the underlying security. It entails making a wager on the price movement of a securities.

Spread Betting Definition: Spread betting is the practise of betting on the direction of a financial market without owning the underlying security. It entails betting on the price movement of a security. A spread betting firm quotes two prices, the bid and ask price (also known as the spread), and investors bet on whether the underlying security's price will be lower or greater than the bid.

In spread betting, the spread bettor does not really hold the underlying asset; instead, they speculate on its price movement.

Spread Betting vs Spread Trading: Spread betting should not be confused with spread trading, which involves holding offsetting positions in two (or more) separate assets and earning if the price gap between them increases or narrows over time.

Key points to remember about Spread Betting

Spread betting allows investors to gamble on the price movements of a wide range of financial assets, including stocks, currency, commodities, and fixed-income securities. In other words, an investor bets on whether the market will grow or decrease from the moment their bet is accepted. They also have the option of deciding how much money they wish to stake on their wager. It is marketed as a tax-free and commission-free activity that allows investors to earn in both bull and downturn markets.

Spread betting is a leveraged instrument, thus investors only need to deposit a tiny portion of the position's worth. For example, if a position is worth AED 100,000 and the margin requirement is 10%, a AED 10,000 deposit is necessary. Because both gains and losses are magnified, investors may lose more than their initial investment.

Despite the danger associated with using large leverage, spread betting provides useful methods for loss management.

Stop-loss orders: Stop-loss orders limit risk by automatically closing out a losing transaction when the market reaches a predefined price level. When a normal stop-loss order is used, the order will cancel your transaction at the best available price after the designated stop value is achieved. When the market is volatile, it is likely that your transaction will be closed out at a lower level than the stop trigger.

Guaranteed stop-loss orders: This type of stop-loss order assures that your transaction will be closed at the precise value you choose, regardless of market conditions. This type of downside protection, however, does not come cheap. Your broker will usually charge you an extra fee for guaranteed stop-loss orders.

Arbitrage, or betting in two directions at the same time, can also help to reduce risk in Spread Betting.

Spread Betting Example: Assume the price of ABC stock is AED 201.50 and a spread-betting broker with a set spread is quoting the bid/ask at AED 200 / AED 203 for investors to trade on. The investor is negative and expects ABC will go below AED 200, so they place a bid to sell at that price. They intend to place a AED 20 wager for every point the stock goes below its transaction price of AED 200. If ABC falls to where the bid/ask is AED 185/AED 188, the investor will have a profit of (AED 200 - AED 188) * AED 20 = AED 240. If the price climbs to AED 212/AED 215 and they close their deal, they will lose (AED 200 - AED 215) * AED 20 = - AED 300.

To cover the bet, the spread betting company demands a 20% margin, which implies the investor must deposit 20% of the position's initial value, or (AED 200 * AED 20) * 20% = AED 800, into their account. The position value is calculated by multiplying the bet amount by the bid price of the stock (AED 20 x AED 200 = AED 4,000).

Long/Short: Traders can gamble on both increasing and decreasing prices. If an individual trades physical shares, he or she must borrow the stock in order to short sell it, which may be time-consuming and costly. Short selling is as simple to do with spread betting as it is to purchase.

No Commissions: Spread betting providers make money from the spreads they offer, thus there are no commissions. There is no separate commission payment, making it easy for investors to keep track of their trading costs and determine the size of their positions.

Spread Betting Taxes: Because spread betting is considered gambling in some tax jurisdictions, any realised gains may be taxed as wins rather than capital gains or income. Before filing their taxes, investors who engage in spread betting should preserve records and consult with an accountant. Profits from Spread Betting are exempt from taxation in the UAE.

Margin Calls: Investors who do not understand leverage may take bets that are too large for their account, resulting in margin calls. Investors should never risk more than 2% of their investment capital (deposit) on a single transaction and should always be informed of the position value of the bet they want to open.

Wide Spreads: Spread betting providers may extend their spreads during instances of volatility. Stop-loss orders may be triggered, increasing trading expenses. Investors should exercise caution when making trades just before earnings releases and economic data.

Spread Betting vs. CFDs

Although CFDs allow investors to trade futures price fluctuations, they are not in and of themselves futures contracts. CFDs do not have predetermined expiry dates and prices, but they trade similarly to conventional securities with buy and sell prices.

Spread bets, on the other hand, have defined expiration dates at the time the bet is placed.

Many spread betting sites will also allow you to trade in contracts for difference (CFDs), which are a sort of contract that is similar to spread betting. CFDs are derivative contracts that allow traders to speculate on short-term price changes. With CFDs, no real commodities or securities are delivered, but the contract itself has transferable value while it is in effect. Thus, the CFD is a tradable security formed between a customer and a broker, who exchange the difference between the transaction's starting price and its value when the trade is unwound or reversed. CFD trading also necessitates upfront payment of commissions and transaction fees to the supplier; spread betting firms, on the other hand, do not charge costs or commissions. When the contract expires and the gains or losses are realised, the investor is either owed money or owes money to the trading business. If profits are realised, the CFD trader will net the closing position profit, less the initial position profit and expenses. Spread bet profits are calculated by multiplying the change in basis points by the initial bet amount.

Dividend payouts are applicable to both CFDs and spread bets assuming a long position contract. Despite the fact that there is no direct ownership of the asset, a provider and spread betting organisation will pay dividends if the underlying asset does as well.

Earnings from CFD transactions and Spread Betting profits are both tax-free in the United Arab Emirates.

Let's Recap the Basics of Spread Betting

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Content Reference: Investopedia

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