Spread Betting is a type of gambling in which the participants do not own the asset they bet on, such as a commodity or stock. Instead, the bettors bet on whether the prices of the asset will fall or rise, based on the prices offered by a broker.
In a stock market trading, two prices are quoted for the spread bets. One is the price at 96ace which it can be bought, and the other is the price at which it can be sold. Spread is the balance between the buying price and the selling price. The brokers make profits from this spread. The investors go with the bid price if they believe that the market will rise and go with the selling price if they think that the market will fall. The key benefit of spread betting is the vast variety of markets available and the tax benefits from it.
Charles K. McNeil is widely known for inventing the concept of spread-betting. He was a mathematics teacher turned bookmaker and created spread-betting in the 1940s. However, it became officially recognized as a form of gambling for the professional financial-industry traders only 30 years later in England. Stuart Wheeler and investment banker in London established a firm called IG Index and offered spread-betting on gold. In the 1970s, the gold market was challenging to participate in for many and spread betting provided a more accessible way into it. Despite being originated in America, spread betting is illegal in the United States.
Like any other form of gambling, spread betting too comes with its own share of risks. However, spread betting does offer some tools to limit the losses. The most common tools are Standard Stop-Loss Orders and Guaranteed Stop-Loss Orders. The standard stop-loss order reduces the risk by automatically closing the trade when the market price reaches the price level, which has been gambled on. On the other hand, guaranteed stop-loss order closes the trade at the exact price level that has been gambled on by the participant. The risk can also be reduced by using arbitrage which is betting two ways simultaneously.
With the advancement in technology and electronic markets, spread betting has successfully reduced the difficulties in entry and has created a massive alternative marketplace.
Spread betting has numerous advantages such as low capital requirement, availability of risk management tools and tax benefits. Despite of these, studies conclude that only 1 out of 5 bettors end up winning. Further, only 1 out of 10 gamblers tend to make a profit while a high number of them suffer losses.