The spread betting strategy is one of the ways of speculating the financial market that is effective in terms of taxation. However, many people wonder how brokers make money from financial spread-betting if no commission fee needs to be paid when performing this action?
We will try to answer these and several other questions for you, but before we get into the questions, let’s understand what spread betting is and what you should know about it.
What is spread betting?
Spread betting is a form of wagering where you can place bets on the outcome rather than having one bet that wins or loses.
The traders seek to profit from the difference in price movements. They do not own any of the trading instruments but simply bet on whether they will rise or fall based on information provided by brokers beforehand, which shows any price changes.
Its main advantages are:
- leveraged
- availability to different markets
- no commissions fee
We will discuss all this in order.
How does spread betting work?
Let’s look at the above with an example.
The trader sells a predetermined amount (let’s say $2) per point of movement of the asset.
If the price of an asset rises above the size of the bet, the trader makes a profit (short for your bid). And if the price falls by points, the trader accordingly loses bids for each point.
How do spread betting companies make money?
Brokers provide traders with spread betting services, but one question remains – how do they make money from it if there is no commission fee? The fact is that brokers receive money from the spreads that they charge clients for trading. But in addition to the market spread, the broker adds a margin.
Difference between Forex trading and spread betting
Beginners are often lost and do not understand what to do among the large numbers of financial markets.
The same is true when it comes to Forex trading and spread betting.
The differences between Forex and spread betting are often subtle, but key points to understanding the two markets include how they work and their benefits.
We have highlighted a few key points by focusing on which you can easily understand the difference between these two.
- Let’s start with the most obvious – the definition of two types of trading.
Forex trading is a process where you can buy and sell different currencies. The spread betting involves the result of these trades, so it is something like gambling.
- If Forex trading is carried out in foreign currency, then spread betting covers a large number of markets – stocks, bonds, the Forex market.
- When trading Forex, the trader deposits the transaction amount on this occasion, or the profit is limited to this amount. In the case of a spread, the trader invests part of the money. As a result, they can trade at a high value, and the profit can be much higher than this value. But do not forget that the loss can be enormous as well.
- The Forex industry is a more established and regulated form of trading than spread betting. This has been the case since it first began many years ago, which means that there are strict rules to keep things running smoothly for traders worldwide who use this currency pairs system as part of their investments strategy.
- Unlike Forex trading, spread betting is prohibited by Islamic law. The reason is that it is considered a form of gambling.
What is better, CFD or spread betting?
CFD (Contract for Difference) trading gives you the opportunity to purchase a contract to own a certain trading instrument. Instead of owning the asset, the trader has a contract for the rights of its ownership.
The answer to the question of which one is better between these two is a bit complicated. It all depends on traders’ requests, opportunities, and subjective opinions.
Let’s consider the main differences between CFD and the spread of betting and understand its advantages.
- As it was clear by definition, when buying and selling CFD, you trade for a certain amount of CFD for trading instruments.
- CFD trading does not have dates or deadlines, while spread bets have expiration dates.
- Spread betting is carried out through brokers; CFD trading can be done directly on the market. It is believed that this ensures the simplicity of transactions. However, it does not guarantee high security. Therefore, when trading CFDs, a broker will never be superfluous. Read more about CFD brokers here.
When does spread betting arbitrage happen?
Let’s move on to such a thing as spread betting arbitrage.
This concept also occurs in real life – when traders buy some goods on the market for a certain price and resell them at much higher prices.
The same is true when it comes to spread betting. When traders buy a spread from one company for X price and sell it for Y price, which is higher than X price, spread arbitrage occurs.
And the difference between the price of X and Y is the trader’s profit.
Best spread betting platforms
When choosing the best spread betting platform, you can compare it with such criteria as:
- number of markets the platform offers
- maximum leverage it offers
- customer care service
Find the list of best spread betting platforms here.
Conclusion
The article introduced you to the definition of spread betting, how it works, and compared it with Forex and CFD trading.
To wrap up, we would like to say that when deciding on this strategy, remember to take into account potential profits and the risks involved in each transaction type as well.
By constantly practising, everyone can learn from their own mistakes, which helps to lead down a successful path towards becoming an experienced trader who knows what they’re doing.
Learn more about forex trading platforms.