What is spread betting?
Spread betting, a type of betting, is unique compared to other forms of wagering such as parimutuel or fixed-odds betting, in that the payout at the end is dependent on the wager’s accuracy rather than the outcome. The term spread comes from the idea concept that the aforementioned spread relates to the varying degree of outcomes. The bet is then placed on where the outcome will be in relation to the spread.
It was initially invented by a former bookmaker by the name of Charles K. McNeil. In recent years, particularly in the United Kingdom, financial spread betting is the largest part of this market. This may in part be due to the fact that, in the UK and Europe, the profit garnered is exempt from taxation. The relevant tax authorities in these areas consider financial spread betting not as an investment, but rather as a gamble. The profits are therefore exempt even from income tax if the trader in question is able to prove that they do not live entirely off of their spread betting profits.
Who does it?
There are many companies involved in spread betting. An example of this is CMC Markets, based in the UK. Founded in 1989, they trade in spread betting among other aspects. While their headquarters are in London, CMC Markets has over 10 different international offices worldwide.
As it is a fast-growing industry within the UK and across other places, the question is raised of how this is possible. Trading within spread betting is vast, ranging from shares, to other commodities and currencies. Unlike other forms of wagering, you needn’t pay a commission fee or even stamp duty.
How does it work?
Based on how you think the market is going to change, you place a bet of a certain amount of money per movement “point” of the item in question. What this means is that, if you decide to bet £10 per point on a commodity you expect to increase in value, you will win £10 for each point of movement in your favoured direction. Your profit (or even loss of money) is magnified by your chosen stake. However, should your chosen commodity start to decline in value, you will lose money. Therein lies the problem.
The actual mathematical analysis of spread betting is fast-growing within mathematics. Different sports may use different systems of points for their growth margins, such as Skellam statistics.
What is the problem with spread betting?
As is the case with any form of wagering, there is always a risk. With spread betting in particular, it is possible for a trader’s losses to end up greater than the money they initially placed on the item. Whilst one’s profits will be magnified, one’s losses will also be too. That could potentially put many people into serious debt, rather than simply losing money that has already been staked on the wager.
An example of this risk happened quite recently. Another UK-based financial derivatives company, IG Group, founded in 1974, lost almost £18,000,000 back in January 2015. What caused this problem was the Swiss National Bank’s announcement that they would be abolishing their currency ceiling and minimum exchange rate policy. This caused a steep increase in the value of the Swiss franc and led to the collapse of currency brokerages as a result. This brought control and assurance within spread-betting under close scrutiny. Many hundreds of customers of IG Group were affected by this loss. A customer, whose name will not be given, had his £2 stake turned into a loss of over £5,000, and this was not the greatest loss. IG Group accepted the following ruling by a governing service that they would have to compensate at least some of the customers that lost money during that time.
What will become of spread betting in the future?
With the current climate of the recession, and with Brexit’s long-term effects looming over the United Kingdom, one could argue that this may lead to more spread betting and, by extension, more opportunities for loss such as what happened in Switzerland.