Spread betting [Spread trading]

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    Spread betsWhat is spread betting?

    When a trader places a bet on the price movement of a security, this is called spread betting, also known as spread trading.

    Spread betting does not involve the actual purchase of an asset. Instead, an investor will bet on whether the price of the asset is likely to rise or fall.

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    It is comparable to any other bet on the outcome of a certain event.

    How the spread betting works

    The spread betting company will offer a bid and ask price for the asset and the trader will bet on the direction of price.

    If you believe that the underlying asset upon which you are placing your bet is going to fall in price, you place a sell bet. Conversely, if you believe that the underlying asset is going to go up in price, you place a buy bet.

    The movement of the asset is measured in points. As the investor, you set the value of each point when you enter the bet. To close the bet you simply place an opposing order to the original buy or sell bet, pocketing the difference in points.

    For example, let’s pretend that Samsung is currently trading 120 – 120.5. Investor A believes that Samsung is going to rise and places a buy bet at 120.5 for £10 a point. Investor B has the opposite view and believes that Samsung is going to fall and places a sell bet at 120 for £10 point.

    In the end, Samsung rises to 125 – 125.5. Investor A is correct and places an opposing sell bet at 125 in order to make his £45 profit (4.5 x £10 = £45). Meanwhile, Investor B decides to cut his losses and close the position at 125, taking a £50 loss (5 points x £10 = £50).

    Taxation

    Spread betting is tax-free in the UK and a number of other European countries. Profits are not subject to income tax or capital gains tax. On the downside, losses cannot offset any gains on the tax return form.

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