Online spread betting refers to the practice of individuals speculating via the Internet on the movement of securities on the financial market for possible monetary gain. It is more akin to gambling than investment, because someone who undertakes a bet on a security never actually owns shares of the underlying company. A spread bettor simply attempts to predict which way the security will move on the market. One of the main risks of online spread betting is the potential for a much greater loss of capital than in normal investing.
Many potential investors study the financial markets each day to see which way certain stocks or other securities move. After such arduous study, they may even feel like they have a knack for predicting how those stocks, funds, or any other type of investment vehicle will perform. For such people, the prospects of online spread betting may outweigh the risks. By finding an online company that offers spread betting, they can essentially bet their own money on how the market will move without ever actually owning a share of stock.
As an example, imagine that an individual wishes to start online spread betting and chooses stock A as his initial target. An online company that offers spread betting quotes a price of $50 US Dollars (USD) per share for stock A, and the bettor decides that he thinks the stock is going to go up. He thus bets $3 USD for every point that stock A rises. If stock A rises to $60 USD per share, that means the investor would gain $3 USD for every point the stock went up, which comes to a $30 USD gain.
Should stock A drop to $35 USD per share, the investor would owe $45 USD for the 15-point drop in prices. Such a significant drop in price is an example of the danger of online spread betting. Whereas an investor is only on the hook for her initial investment, the online spread bettor could lose much more. As prices keep going in the opposite direction of the initial speculation, the losses would continue to mount.
One way for an online spread bettor to avoid this situation is to institute stops in the initial bet that would cut the losses off once the security reached a certain point. Doing this allows a bettor to take advantage of some of the other perks of online spread betting. Among these are the ability to spread out bets all over the market and the luxury of choosing the size of the position taken instead of being forced to make a minimum investment. In addition, the United Kingdom recognizes the gains from spread betting as gambling wins, which are not taxable.