In a Nutshell
- Spread betting on financial markets refers to betting on the direction the price of an asset will move.
- The payout, and risk, of the bet is associated with the size of the change.
- Spread betting is not legal in the United States.
Investors say that playing the various financial markets can feel a lot like gambling, but obviously, there are major differences between buying stocks, bonds, or commodities or investing in funds and placing bets at a casino or offshore gambling site.
The lines between the two activities begin to blur, however, when we move into the realm of spread betting.
Blurring Lines
Even a casual sports bettor will recognize the term “spread” as in the number of points a team gives or is given in a point-spread bet, but that’s not what we’re talking about when it comes to financial betting.
For people coming from the investment world, spread betting seems different, because you’re not buying an actual asset, whether it’s shares of a company or fund, a bond or a physical commodity. Instead, you’re just predicting what you think will happen to that asset in the future. And, since you’re not actually purchasing anything, there are no brokerage or transaction fees associated with the transaction.
For people coming from the betting world, there are also key difference in spread betting compared to what they normally do. In a bet on a football game or horse race, you put down a certain amount of money, and if your wager pays off, you get a predictable, preset payout. If it doesn’t, you lose the amount you put down when you made the bet. That’s not true with spread betting. The amount you earn, or risk, can change and is essentially unlimited.
Spread betting is also illegal in the United States, meaning that you would have to work with an organization from outside the country in order to participate in the practice.
How Does Spread Betting Work?
Spread betting is considered a financial derivative, which means that you’re not dealing with an actual asset (stock, bond, barrel of oil or other commodity), you’re dealing with a product that is derived from that asset. This distinction is usually not important to people familiar with gambling, because a bettor typically doesn’t own the horse or football team they’re betting on.
Normally, in investing, a person will buy an asset whose value they think will increase and sell ones they think will lose value in the future. A spread bettor won’t actually buy the asset. Instead, they place a bet on which direction they think the price will move.
For instance, if an investor thinks GM stock is going to go up, they’ll begin buying shares at the current price and hold them until they think the stock has peaked, then sell before it begins to go down. A spread bettor, instead, will place a bet that GM stock will increase in price. Again, for experienced bettors, this seems like a lot of explanation for something that comes natural to them.
And the Total Is…
The difference for bettors comes when it’s time to calculate how much you’ve won or lost. This is something that investors are familiar with. If you buy GM, there’s the chance, however slim, that the company will fold and you’ll lose everything. There’s also no limit to how high the stock may go, so there’s no telling how much you stand to earn.
This is unfamiliar to gamblers, who put down money at prespecified odds and know how much they’re risking and how much they stand to win.
For instance, if I place a spread bet on GM stock, currently at $28, to go up in value, I also have to specify how much you’re betting per point. (A point is one cent of stock price, in this example.)
So, if I bet GM to increase at a dollar a point, and it goes up to $33, I’ve won $500, since the stock went up 500 points (cents), at a dollar per point (cent). Of course, if the stock drops to $24, I’ve lost $400, since it went 400 points in the wrong direction.
In our example, we bet on GM to go up in value. If you bet that an asset will decrease in value, that’s often referred to as “shorting” the asset.
Safety Valve
Obviously, in the GM example, something unforeseen could happen, and the company may be forced to go out of business, sending the stock to $0. In that case, a spread bettor expecting the stock to go up at $1 a point would be out $2800. So spread betting is not for the meek of heart.
However, there are ways to keep from losing huge sums of money when spread betting. When placing a spread bet, you can also employ a stop loss, which specifies how much you’re willing to lose. If the bet hits your stop loss, your betting provider will automatically exit you from the trade. So, if you put a stop loss on your GM bet of $500, then when GM drops to $23, your bet ends and you have to pay up.
Should I Try It
For the gambler, spread betting is a new and potentially exciting way to flirt with high payouts. For investors, the benefit is you don’t need to come up with the large sums of money required to buy assets outright.
It can be risky, and it takes a while to master the craft, but spread betting is an exciting way to diversify your portfolio of investments or wagers.
