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Spread Betting

Spread betting has a number of major advantages over other methods of trading. Here are some important benefits which traditional brokers won't offer you:

Tax free profits* Because your transaction is a bet, all your profits are free from UK capital gains tax and income tax*.

Go long or short You can 'buy' or 'sell' any share or index that a firm quotes, so you can make money in either a rising or a falling market.

Immediate dealing You can deal immediately on any price.

Limited Risk With most firms you can, if you choose, put an absolute limit on your maximum possible loss without affecting your ability to make potentially unlimited profits.

No commission, fees or stamp duty There are no other costs on top of the bid/offer spread that you can see.

*Tax law can, of course, be changed or may differ outside of the UK.

Remember that spread betting is a leveraged product and can result in losses that exceed your initial deposit. It may not be suitable for everyone, so please ensure that you fully understand the risks involved.

IG Index are authorised and regulated by the Financial Services Authority.

How does it work? Spread betting is an easy and flexible way of backing your judgement on financial markets. The degree to which you are right (or wrong) in your judgement determines how much you make (or lose).

In other words, the more you are correct, the more money you make (and vice versa).

How this works is best illustrated by using a simple example.

The basic concept Say you thought shares in BP were cheap and were likely to rise in the near future. One way of backing this view would be to invest money in BP by purchasing actual shares in the company. If your view proved to be correct, you could sell your shares at a higher price than you bought them, in order to make a profit.

An alternative way of backing your judgement would be to make a spread bet, backing the price to rise, as shown in the example below.

A spread betting firm quotes two-way prices (the spread on the market), which you can either 'buy' (backing the price to rise) or 'sell' (expecting the price to fall).

Example: 'Buying' BP

It is September. The spread betting price for December BP (a bet that expires at a certain date in December) might be 418 - 421.

As you expect the price to rise, you would make an up-bet, by buying at 421, the higher end of the quote.

Bet size As with normal share dealing, the larger your deal size the more you stand to make or lose for a given market movement. However, instead of dealing in numbers of shares or contracts, spread bets are denominated in pounds per point. With some firms you can bet on shares in as little as £1/point (penny).

You might decide to 'buy' £5/point. This means that you make £5 for every point that our price rises above 421 (and you lose £5 for every point it falls below 421). A £5/point bet is the equivalent of buying 500 shares, because in each case a penny movement in the share price is worth £5 to you.

Closing your bet You were right! BP shares enjoy a good couple of months, and by the middle of November the price for December BP is 483 - 486. You decide to take your profit and close your position by 'selling' £5/point at 483, the lower end of the quote.

Calculating the result

Closing level 483 Opening level 421 Difference 62

Profit 62 x £5 = £310

For further Spread Betting examples and descriptions - see below....