Spread betting guide
Spread betting is any of various types of betting on the outcome of an event, where the pay-off is based on the accuracy of the bet, rather than a simple “win or lose” outcome, which is known as money-line betting. A spread is a range of outcomes, and the bet is whether the outcome will be above or below the spread.
Spread betting market has known a significant growth in the UK in recent years, with the number of gamblers heading towards one million. As with all gambling, however, spread betting carries a high level of risk.
In the UK, spread betting is regulated by the Financial Services Authority rather than the Gambling Commission.
Purpose
The general purpose of spread betting is to create an active market for both sides of a wager, even if the outcome of an event may appear a priori to be biased towards one side or the other. In a sporting event, for example, a strong team may be pitted against a historically weaker team. Persons betting on the event normally would be likely to favor the better team, to such an extent that there would be very few, if any, betting on the underdog that is team perceived to be worse.
The use of a “point spread” evens out the market towards an equal number of participants on each side of the wager. This allows a bookmaker to make a market by accepting wagers on both sides of the spread. The bookmaker charges a commission and acts as the counterparty for each participant. As long as the number of participants on each side is roughly equal, the bookmaker is unconcerned with the actual outcome; profits instead come from the commissions.
Examples
Spread betting can be easily explained through examples.
We will use the market of ‘corners’ in a football match as this is easy to relate to. This market is based on the total number of corners accumulated by both sides in a game.
In a soccer match the bookmaker believes that 10 or 11 corners will occur, thus the spread will be set at 10-11.
Example
Match: Arsenal vs. Bolton
Spread for corners: 10-11.
Buy Example
A gambler believes there will be more than 11 corners and “buys” $20/point at 11.
Profit: You were right. The final number of corners was 15, i.e. 4 more than 11, the number of corners you bought at. You win 4 x $20 = $80 (tax free)
Loss: You were wrong. The final number of corners was 8, i.e. 3 less than 11, the number of corners you bought at. You lose 3 x $20 = $60
Sell Example
You believe there will be less than 11 corners. So, you sell $20/point at 10.
Profit: You were right. The final number of corners was 8, i.e. 2 less than 10, the number of corners you sold at. You win 2 x $20 = $40 (tax free)
Loss: You were wrong. The final number of corners was 15, i.e. 5 more than 10, the number of corners you sold at. You lose 5 x $20 = $100
You will notice that ‘buy’ transactions are made at the top end of the spread and ’sell’ transactions are made at the bottom end.
Spread Betting may seem complex, but it is relatively easy to pick up. Good luck!