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Financial Spreadbetting

We can say that there are several types of bets based on financial markets instruments which allow  to speculate in a wide range of markets (some brokers and bookmakers that specialize in financial markets betting offer literally thousands of financial instruments as underlying assets).These types of bets have fundamental differences in execution, profit levels and levels of risk, but all are based on the principle of betting on the behavior of the price of a specific financial instrument. The following are the main types of bets based on financial instruments:

  • Financial Spread Betting (these are leveraged trades)
  • Financial Betting  (can be considered a type of binary option).

What is financial Spread Betting?

We can define the spread betting as any of the various types of bets based on the results of an event, where payment is based on the accuracy of the bet rather than a simple result of “winning or losing”, as is in the case of fixed-odds betting or parimutuel betting. In this section, we will focus specifically on financial spread betting, the kind of betting based on events related to financial markets as Forex for example.

A spread (not to be confused with the spread of Forex) is defined as a range of possible outcomes, and the bet is whether the outcome will be above or below the spread. The spread betting has become particularly popular in countries like United Kingdom in recent years, so the number of gamblers or traders is growing every day. This popularity is due mainly to the large potential of gains of the spread betting, which far exceeds the amount of money that is risked. However, at the same time the potential for loss is also high, so the gambler can lose a lot of money if not careful. In fact, in the UK, this activity is regulated by the FCA (Financial Conduct Authority) instead of the Gaming Commission. The FCA is the organization that regulates the financial activities of that country.

Financial spread betting is a way to speculate on financial markets in a very similar as some financial derivatives. For example, the Contracts For Difference (CFD) in many ways mirrors the spread bet. For this reason, many financial derivative trading companies offer both financial spread bets and CFDs at the same time through the same trading platform.

Advantages of spread betting

The main advantages offered by spread betting trades are the following:

  • The spread betting offers a high leverage which means that there is the potential to obtain high profits.
  • The earnings obtained with spread betting are tax free.
  • Companies and Bookmakers (not just the bookmakers offer spread betting, in fact some brokers that trade directly in the financial markets do) that offer spread betting work 24 hours a day, 7 days a week.
  • The trader can use stop loss orders and in some cases, the companies allow the use of a guaranteed exercise price.
  • No charges of any kind of fees for transactions, the trader must pay only the spread (which is the difference between purchase price and the selling price).
  • The Financial spread trading offers a variety of instruments on which we can bet such as currencies, stock indices, stocks, commodities, interest rates and others.
  • The financial spread betting opens the possibility to cover our portfolio with bets on financial markets.
  • There is the possibility of arbitrage between different bookmakers and brokers. This allows to obtain a totally secure profit regardless of the outcome of the event.
  • The spread betting allows the trader to open long and short positions easily in any of the many instruments it offers.

Thus, the spread betting offers pretty good trading conditions, which makes it an almost ideal market for the trader, but as with everything, it also has its negative aspects.

Disadvantages of financial spread betting

Of course not all are advantages with the spread betting, there are also some negative aspects to which the traders must be careful to keep their money safe.

  • Most companies that offer financial spread betting are located in UK and are regulated by the FCA, which  gives the traders more security with respect to their capital and the practices of the company . However, there are some bookmakers and brokers that have no regulation, so it is better to avoid these companies if we do not want to be at the mercy of a company with fraudulent practices. Moreover, if we are cheated by a company regulated by the FCA, we can claim and present our case and receive a compensation of £48 000.
  • Binary Betting Bets are not regulated by the FCA, so the trader has no right to make the slightest claim if the company does something wrong. In other words, if you open an account to make Binary Betting bets you will be at the disposal of what the company decides, so it is better to choose a company with a good reputation if you are interested in Binary Betting.
  • The companies  determine the spread (sometimes large) and prices for betting at all times. For this reason we will not always have at our disposal information completely adjusted to reality. In most cases, the trader does not have clear information on market depth, including transactions.
  • Some of these companies have been accused of price manipulation, close the account of the traders who profited constants, prevent the execution of an order and delayed the transfer of money, especially if it is a significant amount of money. Of course these are isolated cases and not a common practice in the industry.

To understand how the financial spreadbetting works, we will explain in detail the three forms of spread betting that currently exist, which function quite similar.

Traditional Financial Spreadbetting

In this case we are going to give an example to understand how the traditional spread betting works. Let´s suppose that we want to make a bet on the S&P 500 and we believe that during the next session is going to rise. For that reason, the day we are going to make the bet we look at the quotes of the S&P 500 and see which are 1300 points.

So we decided to make a commitment to buy $ 10 per point at 1300. Now, assuming we succeed in our forecast and indeed the S & P 500 rose about 100 points being the price at 1400 points, entered the mind of the house with that bet and closed position to make gains for which we sell 1400. Thus, with the difference between purchase price and the selling price of 100 points the gain would be 100 points x 10 USD / point = 1000 USD, which as mentioned would be tax free.

Unlike financial derivatives such as Options or Futures, it does not require any warranty, just the money that allows to face the potential losses that these bets can take. While the above example we used a value of $ 10 per point, the value can be set directly by the trader, which thus decide how much you want to risk in the operation.

Betting on the spread betting have a limited time, which may be daily or quarterly for example. Upon reaching the date the bet is settled finally by which it is stated that the betting spread betting are similar to options in how they operate.

Financial Betting

The term Financial betting refers to wagers based on the behavior and outcome of the price of a financial market instrument  sometime in the future compared with the current price of the instrument and against the predictions offered by a bookmaker or broker. In other words, these are bets based on the prices of the many instruments offered by financial markets.The maximum potential payout of the bet is known in advance when the bet is made while the maximum potential loss is also known in advance and is limited to the initial bet or stake.

Thus, we can say that the financial betting instruments are a type of digital option. This is because the outcome of the bet when its period ends (at settlement) is binary, that is, either a win or a loss. The settlement of the bet is executed in cash and there is not a delivery of the underlying asset. At any point in time before the time of settlement, it is common that the bets can be sold, allowing the possibilities of betting in relation to the accuracy of a movement in the market within fixed limits of zero gain (loss of the bet) and the maximum potential gain. In these cases a fee may be charged for this service sometimes.

The main difference between Financial betting and speculation in financial markets through products such as financial spread betting is that the bet should offer a simple binary result of win or loss based on an event directly related to the price of a financial instrument (in this case the trader is betting that the price of an instrument will go up or down). Due to this feature, Financial betting operations offer a fixed payment with a fixed level of losses. On the contrary, the Financial spread betting operations, in which the loss and payment vary directly with the level of underlying asset prices, can cause gains and losses greater than the amount originally invested.

The following are the main types of financial bets

Fixed odds betting 

This type of bet is very similar to traditional betting and that the maximum loss is limited to the amount wagered and the gain is obtained if the event occurs we predicted. Likewise, the payment is determined according to the probability that event occurs.

To understand the concept, let´s suppose we believe that the Dow Jones will close above 12100 at the end of a specific period of time. For its part the bookmaker through a computer program determines the cost of the bet and show us that cost so we can decide if we want to place the bet or not.

As in any other bet, the less likely to occur has the event predicted, the higher the payout that the book offers in relation to the cost of the bet we made. For events that are safe, not offered any payment for which you can not bet on it. Fixed Odds betting on can find many types and options the difference is based primarily on the events that can be expected. These types of Fixed Odds are as follows:

  • Bull Bet: This bet is if the price of an asset will finish above a certain value at the end of the day.
  • Bear Bet: In this case, you bet you bet if the asset price will end up below a value determined at the end of the day.
  • One Touch Bet: The bet is whether the asset price is going to play a certain price level before the end of the period of the bet.
  • No Touch Bet: Unlike One Touch Bet betting, the bet is that the price of an asset is not going to play a specific price level before the end of the period of the bet.
  • Expiry Range Bet: Basically you bet that the price of an asset will remain within a price range determined during the duration of the bet.
  • Barrier Range Bet: The operator is betting that the price of assets will not touch a particular price range or upward or downward before the end of the period of the bet is usually 1 week.
  • Double Touch Bet: Through this option, the gambler determines whether the asset price will touch both the upper and lower price range before the end of the period of the bet, which is usually 1 month.
  • Up or Down Bet: A Double Touch Bet difference, you bet that the price will touch the lower or upper range by the end of the period of the bet.
  • Double Up Bet: This bet pays twice the amount wagered if the market at the end of the session closing above a set price.
  • Double Down Bet: This bet pays twice the amount wagered if the market at the end of the session closing down a set price.

The Fixed Odds betting offers quite broad possibilities for traders. Its operation is very similar to the different types of Binary Options (all or nothing options, options one touch, no touch options, etc), so that any trader familiar with this type of options can easily learn to make bets based on Fixed Odds. In this case, we must mention that the operator must pay a small commission for each bet the house that is operating.

The Binary Betting

The Binary Betting is a mixture of the two types of spread betting mentioned above. In first place, the company shows bid and offer prices in real time for the bet and secondly, the prices that are being quoted do not correspond to the value of the financial instrument, but the probability of occurrence of an event related to a specific instrument, which are always numbers ranging from 0 (impossible event to occur) to 100 (sure event).

To understand how this type of financial spread betting works, let´s suppose that we want to bet that the IBEX 35 index will end  up at the end of the trading session. Now let´s suppose that the company says the odds for this event are 75-79, which means that the company is quite certain that the IBEX 35 is going to be up. According to these quotes, if we had wanted to bet on the contrary that the IBEX 35 is going to be down, the company had offered us the reverse spread, which would give an estimate of 21-25. If we are agree with the quote,  we buy the bet and indicate the amount of money per point that we wish to bet. In this case, let´s say that we bet $10 for each point buying at $79.

If the event is confirmed, meaning that effectively ended IBEX upward at the close of the trading session, then the bets we buy ends with a value of 100. Then the gain would be 10 USD / point x 25 = 250 USD. On the contrary, if the IBEX had ended down our bet would have won with value 0, with which we had had a losing $ 10 / point x 75 = 750 USD. In general, binary betting, bookmakers can not use stop orders and limit orders as these significantly limit their profits, so it is important to carefully consider the contributions and the amount you wish to bet per point before make the bet because as seen in the example above losses can be significant.

Companies that offers financial spread betting and financial betting to its clients

Currently, besides the traditional bookmakers, some brokers specialized in different financial instruments (Forex, commodities, stocks, indexes, etc.) and financial derivative trading companies offer financial  Spread Betting and other types of bets in the markets to their customers. For example, due to the similarity in the trading features of the Contracts For Difference and Financial Spread Betting, many companies offer both types of instruments of speculation based on virtually the same underlying assets. Below is a list of bookmakers and regulated brokers that offer this type of financial speculation instruments:

Broker/Company

Trading instruments

Minimum amount of capital

Complete review

Finspreads

-Financial Spread Betting

100

Review

City Index

-Forex trading

-Contracts For Difference

-Financial Spread Betting

100

Review

Tradefair

-Financial spread betting

100

Review

Financial Spreads

-Financial spread betting

100

Review

Intertrader

-Forex trading

-Contracts For Difference

-Financial Spread Betting

100

Review

Binary.com

-Financial Betting

100

Review

ETXCapital

-Financial spread betting

100

Review

 

 


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