Spread betting
Encyclopedia
Spread betting is any of various types of wagering on the outcome of an event, where the pay-off is based on the accuracy of the wager, rather than a simple "win or lose" outcome, such as fixed-odds (or money-line) betting or parimutuel betting
. A spread is a range of outcomes and the bet is whether the outcome will be above or below the spread. Spread betting has been a major growth market in the UK in recent years, with the number of gamblers heading towards one million. Spread betting carries a high level of risk, with potential losses or gains far in excess of the original money wagered. In the UK, spread betting is regulated by the Financial Services Authority
rather than the Gambling Commission
.
for both sides of a binary wager
, even if the outcome of an event may appear a priori
(prima facie) to be biased towards one side or the other. In a sporting event a strong team may be matched up against a historically weaker team; almost every game will have a favorite and an underdog. If the wager is simply "Will the favorite win?", more bets are likely to be made for the favorite, possibly to such an extent that there would be very few betters willing to take the underdog.
The point spread is essentially a handicap towards the underdog. The wager becomes "Will the favorite win by more than the point spread?" The point spread can be moved to any level to create 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
, or vigorish
, and acts as the counterparty
for each participant. As long as the total amount wagered on each side is roughly equal, the bookmaker is unconcerned with the actual outcome; profits
instead come from the commissions.
Because the spread is intended to create an equal number of wagers on either side, the implied probability is 50% for both sides of the wager. In order to profit, the bookmaker must pay one side (or both sides) less than this notional amount. In practice, spreads may be perceived as slightly favoring one side, and bookmakers will often revise their odds in order to manage their event risk.
, a mathematics teacher from Connecticut
who became a bookmaker in Chicago
in the 1940s. The idea became popular in the United Kingdom
in the 1980s. In North America
, the gambler usually wagers that the difference between the scores of two teams will be less than or greater than the value specified by the bookmaker
. An example:
Spreads are frequently, though not always, specified in half-point fractions to eliminate the possibility of a tie, known as a push. In the event of a push, the game is considered no action, and no money is won or lost. However, this is not a desirable outcome for the sports book, as they are forced to refund every bet, and although both the book and its bettors will be even, if the cost of overhead is taken into account, the book has actually lost money by taking bets on the event. Sports books are generally permitted to state "ties win" or "ties lose" to avoid the necessity of refunding every bet.
A teaser is a bet that alters the spread in the gambler's favor by a predetermined margin – in American football
the teaser margin is often six points. For example, if the line is 3.5 points and the bettor wants to place a teaser bet on the underdog, he takes 9.5 points instead; a teaser bet on the favorite would mean that the gambler takes 2.5 points instead of having to give the 3.5. In return for the additional points, the payout if the gambler wins is less than even money
. At some establishments, the "reverse teaser" also exists, which alters the spread against the gambler, who gets paid at more than evens if the bet wins.
In the UK, these bets are sometimes called spread bets, but rather than a simple win/loss, the bet pays more or less depending on how far from the spread the final result is.
Example: In a football match the bookmaker believes that 12 or 13 corners
will occur, thus the spread will be set at 12-13.
In North American sports betting many of these wagers would be classified as over-under
(or, more commonly today, total) bets rather than spread bets. However, these are for one side or another of a total only, and do not increase the amount won or lost as the actual moves away from the bookmaker's prediction. Instead, over-under or total bets are handled much like point-spread bets on a team, with the usual 10/11 (4.55%) commission applied. Many Nevada sports books will allow these bets to be used in parlay
s, just like team point spread bets, making it possible to bet, for instance, "the Packers
and the over", and be paid if both the Packers "cover" the point spread and the total score is higher than the book's prediction. (Such parlays usually pay off at odds of 13:5 with no "vig", just as a standard two-team parlay would.)
of spreads and spread betting is a large and growing subject. For example, sports that have simple 1-point scoring systems (e.g., baseball
, hockey
, and soccer) may be analysed using Poisson
and Skellam statistics.
instruments; the leading spread-betting companies make most of their revenues from financial markets, their sports operations being much less significant. Financial spread betting in the United Kingdom closely resembles the futures and options markets, the major differences being
Financial spread betting is a way to speculate on financial markets in the same way as trading a number of derivatives. In particular the financial derivative Contract for difference
(CFD) which in many ways mirrors the spread bet. In fact a number of Financial derivate trading companies offer both financial spread bets and CFDs in parallel using the same trading platform.
Unlike fixed-odds betting, the amount won or lost can be unlimited as there is no single stake to limit any loss. However, it is usually possible to negotiate limits with the bookmaker
:
Spread betting has moved outside the ambit
of sport and financial markets (that is, those dealing solely with share, bonds and derivatives), to cover a wide range of markets, such as house prices
.
In a falling stockmarket, financial spread betting can also be used by investors as a means of hedging against predicted losses in a portfolio of shares.
and stamp tax
, despite the fact that its regulated as a financial product by the Financial Services Authority
in the UK. Most traders are also not liable for Income Tax
unless they rely solely on their profits from financial spread betting to support themselves. The popularity of financial spread betting in the UK and some other European countries, compared to trading other speculative financial instruments such as CFDs and futures is partly due to this tax advantage. However, this also means any losses cannot be offset against future earnings for tax calculations.
Conversely, in most other countries financial spread betting income is considered taxable. For example the Australian Tax Office issued a decision in March 2010 saying "Yes, the gains from financial spread betting are assessable income under section 6-5 or section 15-15 of the ITAA 1997". Similarly, any losses on the spread betting contracts are deductible. This has resulted in a much lower interest in financial spread betting in those countries.
is trading on the market at 410p bid, and 411p offer. A spread-betting company is also offering 410-411p. We use cash bets with no definite expiry, or "rolling daily bets" as they are referred to by the spread betting companies.
If I think the share
price is going to go up, I might bet £10 a point (i.e., £10 per penny the shares moves) at 411p. We use the offer price since I am "buying" the share (betting on its increase). Note that my total loss (if LloydsTSB went to 0p) could be up to £4110, so this is as risky as buying 1000 of the shares normally.
If a bet goes overnight, the bettor
is charged a financing cost (or receives it, if the bettor is shorting the stock). This might be set at LIBOR + a certain percentage
, usually around 2/3%.
Thus, in the example, if Lloyds TSB are trading at 411p, then for every day I keep the bet open I am charged [taking finance cost to be 7%] ((411p x 10) * 7% / 365 ) = £0.78821 (or 78.8p)
On top of this, the bettor needs an amount (AKA collateral
) in the spread-betting account to cover potential losses. Usually this is either 5 or 10% of the total exposure you are taking on but can go up to 100% on illiquid stocks. In this case £4110 * 0.1 or 0.05 = £411.00 or £ 205.50
If at the end of the bet Lloyds TSB traded at 400-401p, I need to cover that £4110 - £400*10 (£4000) = £110 difference by putting extra deposit (or collateral) into the account.
The bettor will usually receive all dividends and other corporate adjustments in the financing charge each night. For example, suppose Lloyds TSB goes ex-dividend with dividend of 23.5p. The bettor will receive that amount. The exact amount received varies depending on the rules and policies of the spread betting company, and the taxes that are normally charged in the home tax country of the shares.
Parimutuel betting
Parimutuel betting is a betting system in which all bets of a particular type are placed together in a pool; taxes and the "house-take" or "vig" is removed, and payoff odds are calculated by sharing the pool among all winning bets...
. A spread is a range of outcomes and the bet is whether the outcome will be above or below the spread. Spread betting has been a major growth market in the UK in recent years, with the number of gamblers heading towards one million. Spread betting carries a high level of risk, with potential losses or gains far in excess of the original money wagered. In the UK, spread betting is regulated by the Financial Services Authority
Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
rather than the Gambling Commission
Gambling Commission
The Gambling Commission is Great Britain's regulatory body for most, but not all, gambling.-History:It was established under the Gambling Act 2005 and assumed full powers in 2007, taking over responsibility from the Gaming Board for Great Britain, in regulating arcades, betting, bingo, casinos,...
.
Purpose
The general purpose of spread betting is to create an active marketMarket
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
for both sides of a binary wager
Wager
Wager can refer to:* Gambling* A scientific wager* A legal wager under the Roman legal system* WAGR syndrome - a rare genetic syndrome-Given name:*Wager Swayne , American military Governor-Surname:...
, even if the outcome of an event may appear a priori
A priori (statistics)
In statistics, a priori knowledge is prior knowledge about a population, rather than that estimated by recent observation. It is common in Bayesian inference to make inferences conditional upon this knowledge, and the integration of a priori knowledge is the central difference between the Bayesian...
(prima facie) to be biased towards one side or the other. In a sporting event a strong team may be matched up against a historically weaker team; almost every game will have a favorite and an underdog. If the wager is simply "Will the favorite win?", more bets are likely to be made for the favorite, possibly to such an extent that there would be very few betters willing to take the underdog.
The point spread is essentially a handicap towards the underdog. The wager becomes "Will the favorite win by more than the point spread?" The point spread can be moved to any level to create an equal number of participants on each side of the wager. This allows a bookmaker
Bookmaker
A bookmaker, or bookie, is an organization or a person that takes bets on sporting and other events at agreed upon odds.- Range of events :...
to make a market by accepting wagers on both sides of the spread. The bookmaker charges a commission
Commission (remuneration)
The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...
, or vigorish
Vigorish
Vigorish, or simply the vig, also known as juice or the take, is the amount charged by a bookmaker, or bookie, for his services. In the United States it also means the interest on a shark's loan. The term is Yiddish slang originating from the Russian word for winnings, выигрыш vyigrysh...
, and acts as the counterparty
Counterparty
A counterparty is a legal and financial term. It means a party to a contract. A counterparty is usually the entity with whom one negotiates on a given agreement, and the term can refer to either party or both, depending on context....
for each participant. As long as the total amount wagered on each side is roughly equal, the bookmaker is unconcerned with the actual outcome; profits
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
instead come from the commissions.
Because the spread is intended to create an equal number of wagers on either side, the implied probability is 50% for both sides of the wager. In order to profit, the bookmaker must pay one side (or both sides) less than this notional amount. In practice, spreads may be perceived as slightly favoring one side, and bookmakers will often revise their odds in order to manage their event risk.
Spreads in sports wagering
Spread betting was invented by Charles K. McNeilCharles K. McNeil
Charles K. McNeil is the inventor of the point spread in sports gambling. McNeil earned a Master's Degree from the University of Chicago. He then taught math at the Riverdale Country School in New York and in Connecticut. His students included John F. Kennedy. He was also a securities analyst...
, a mathematics teacher from Connecticut
Connecticut
Connecticut is a state in the New England region of the northeastern United States. It is bordered by Rhode Island to the east, Massachusetts to the north, and the state of New York to the west and the south .Connecticut is named for the Connecticut River, the major U.S. river that approximately...
who became a bookmaker in Chicago
Chicago
Chicago is the largest city in the US state of Illinois. With nearly 2.7 million residents, it is the most populous city in the Midwestern United States and the third most populous in the US, after New York City and Los Angeles...
in the 1940s. The idea became popular in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
in the 1980s. In North America
North America
North America is a continent wholly within the Northern Hemisphere and almost wholly within the Western Hemisphere. It is also considered a northern subcontinent of the Americas...
, the gambler usually wagers that the difference between the scores of two teams will be less than or greater than the value specified by the bookmaker
Bookmaker
A bookmaker, or bookie, is an organization or a person that takes bets on sporting and other events at agreed upon odds.- Range of events :...
. An example:
- The bookmaker advertises a spread of 4 points in a certain game;
- If the gambler bets on the "underdogUnderdog (competition)An underdog is a person or group in a competition, frequently in electoral politics, sports and creative works, who is popularly expected to lose. The party, team or individual expected to win is called the favorite or top dog. In the rare case where an underdog wins, the outcome is an upset. These...
", he is said to take the points and will win if the underdog's score plus the spread is greater than the favorite's score.
-
-
- The eventual score is Underdog 8, Favorite 10: 8 + 4 > 10, so the gambler wins;
- The eventual score is Underdog 8, Favorite 13: 8 + 4 < 13, so the gambler loses.
- If the gambler bets on the "favorite", he gives the points and will win if the favorite's score minus the spread is greater than the underdog's score:
- The eventual score is Underdog 5, Favorite 10: 10 - 4 > 5, so the gambler wins;
- The eventual score is Underdog 8, Favorite 10: 10 - 4 < 8, so the gambler loses.
-
Spreads are frequently, though not always, specified in half-point fractions to eliminate the possibility of a tie, known as a push. In the event of a push, the game is considered no action, and no money is won or lost. However, this is not a desirable outcome for the sports book, as they are forced to refund every bet, and although both the book and its bettors will be even, if the cost of overhead is taken into account, the book has actually lost money by taking bets on the event. Sports books are generally permitted to state "ties win" or "ties lose" to avoid the necessity of refunding every bet.
A teaser is a bet that alters the spread in the gambler's favor by a predetermined margin – in American football
American football
American football is a sport played between two teams of eleven with the objective of scoring points by advancing the ball into the opposing team's end zone. Known in the United States simply as football, it may also be referred to informally as gridiron football. The ball can be advanced by...
the teaser margin is often six points. For example, if the line is 3.5 points and the bettor wants to place a teaser bet on the underdog, he takes 9.5 points instead; a teaser bet on the favorite would mean that the gambler takes 2.5 points instead of having to give the 3.5. In return for the additional points, the payout if the gambler wins is less than even money
Even money
Even money describes a wagering proposition with even odds - if the bettor loses a bet, he or she stands to lose the same amount of money that the winner of the bet would win . The term has come to have meaning in the wider English usage beyond actual gambling, however, as a way of describing an...
. At some establishments, the "reverse teaser" also exists, which alters the spread against the gambler, who gets paid at more than evens if the bet wins.
Bets on the total (over/under)
In addition to the spread bet, a very common "side bet" on an event will be the total (commonly called the over/under or O/U) bet. This is a bet on the total number of points scored by both teams. Suppose the Cowboys are playing the Giants and the total is set at 44.5 points. If the final score is Cowboys 24, Giants 17, the total is 41 and bettors who took the under will win. If the final score is Cowboys 30, Giants 31, the total is 61 and bettors who took the over will win. The total is popular because it allows gamblers to bet on their overall perception of the game (e.g., a high-scoring offensive show or a defensive battle) without needing to pick the actual winner.In the UK, these bets are sometimes called spread bets, but rather than a simple win/loss, the bet pays more or less depending on how far from the spread the final result is.
Example: In a football match the bookmaker believes that 12 or 13 corners
Corner kick
A corner kick is a method of restarting play in a game of association football. It was first devised in Sheffield under the Sheffield Rules 1867...
will occur, thus the spread will be set at 12-13.
- A gambler believes that there will be more than 13 corners, and "buys" at £25 a point at 13.
- If the number of corners is 16, the gambler wins (16 - 13) = 3 x £25.
- If the number of corners is 10, the gambler loses (13 - 10) = 3 x £25.
- A "sell" transactionFinancial transactionA financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. It involves a change in the status of the finances of two or more businesses or individuals.-History:...
is similar except that it is made against the bottom value of the spread. - Often "live pricing" will change the spread during the course of an event, allowing a profit to be increased or a loss minimized.
In North American sports betting many of these wagers would be classified as over-under
Over-under
An over-under or over/under bet is a wager in which a sportsbook will predict a number for a statistic in a given game , and bettors wager that the actual number in the game will be either higher or lower than that number...
(or, more commonly today, total) bets rather than spread bets. However, these are for one side or another of a total only, and do not increase the amount won or lost as the actual moves away from the bookmaker's prediction. Instead, over-under or total bets are handled much like point-spread bets on a team, with the usual 10/11 (4.55%) commission applied. Many Nevada sports books will allow these bets to be used in parlay
Parlay (gambling)
A parlay or accumulator is a single bet that links together two or more individual wagers and is dependent on all of those wagers winning together. The benefit of the parlay is that there are much higher payoffs than placing each individual bet separately since the difficulty of hitting it is much...
s, just like team point spread bets, making it possible to bet, for instance, "the Packers
Green Bay Packers
The Green Bay Packers are an American football team based in Green Bay, Wisconsin. They are members of the North Division of the National Football Conference in the National Football League . The Packers are the current NFL champions...
and the over", and be paid if both the Packers "cover" the point spread and the total score is higher than the book's prediction. (Such parlays usually pay off at odds of 13:5 with no "vig", just as a standard two-team parlay would.)
Mathematics of spread betting
The mathematical analysisAnalysis
Analysis is the process of breaking a complex topic or substance into smaller parts to gain a better understanding of it. The technique has been applied in the study of mathematics and logic since before Aristotle , though analysis as a formal concept is a relatively recent development.The word is...
of spreads and spread betting is a large and growing subject. For example, sports that have simple 1-point scoring systems (e.g., baseball
Baseball
Baseball is a bat-and-ball sport played between two teams of nine players each. The aim is to score runs by hitting a thrown ball with a bat and touching a series of four bases arranged at the corners of a ninety-foot diamond...
, hockey
Ice hockey
Ice hockey, often referred to as hockey, is a team sport played on ice, in which skaters use wooden or composite sticks to shoot a hard rubber puck into their opponent's net. The game is played between two teams of six players each. Five members of each team skate up and down the ice trying to take...
, and soccer) may be analysed using Poisson
Poisson distribution
In probability theory and statistics, the Poisson distribution is a discrete probability distribution that expresses the probability of a given number of events occurring in a fixed interval of time and/or space if these events occur with a known average rate and independently of the time since...
and Skellam statistics.
Financial spread betting
By far the largest part of the official market in the UK concerns financialFINANCIAL
FINANCIAL is the weekly English-language newspaper with offices in Tbilisi, Georgia and Kiev, Ukraine. Published by Intelligence Group LLC, FINANCIAL is focused on opinion leaders and top business decision-makers; It's about world’s largest companies, investing, careers, and small business. It is...
instruments; the leading spread-betting companies make most of their revenues from financial markets, their sports operations being much less significant. Financial spread betting in the United Kingdom closely resembles the futures and options markets, the major differences being
- the "charge" occurs through a wider bid-offer spreadBid-offer spreadThe bid–offer spread for securities is the difference between the prices quoted for an immediate sale and an immediate purchase...
; - spread betting has a different tax regimeRegimeThe word regime refers to a set of conditions, most often of a political nature.-Politics:...
compared with securities and futures exchanges (see below); - spread betting is more flexible since it is not limited to exchange hours or definitions, can create new instruments relatively easily (e.g. individual stock futures), and may have guaranteed stop losses (see below); and
- the trading is off-exchangeOver-the-counter (finance)Within the derivatives markets, many products are traded through exchanges. An exchange has the benefit of facilitating liquidity and also mitigates all credit risk concerning the default of a member of the exchange. Products traded on the exchange must be well standardised to transparent trading....
, with the contract existing directly between the market-making company and the client, rather than exchange-cleared, and is thus subject to a lower level of regulationRegulationRegulation is administrative legislation that constitutes or constrains rights and allocates responsibilities. It can be distinguished from primary legislation on the one hand and judge-made law on the other...
although the spread betting companies themselves are some of the most regulated entities in the City of London.
Financial spread betting is a way to speculate on financial markets in the same way as trading a number of derivatives. In particular the financial derivative Contract for difference
Contract for difference
In finance, a contract for difference is a contract between two parties, typically described as "buyer" and "seller", stipulating that the buyer will pay to the seller the difference between the current value of an asset and its value at contract time...
(CFD) which in many ways mirrors the spread bet. In fact a number of Financial derivate trading companies offer both financial spread bets and CFDs in parallel using the same trading platform.
Unlike fixed-odds betting, the amount won or lost can be unlimited as there is no single stake to limit any loss. However, it is usually possible to negotiate limits with the bookmaker
Bookmaker
A bookmaker, or bookie, is an organization or a person that takes bets on sporting and other events at agreed upon odds.- Range of events :...
:
- A "stop loss" or "stop" will automatically close the bet if the spread moves against the gambler by a specified amount.
- A "stop win", "limit" or "take profit" will close the bet when the spread moves in a gambler's favor by a specified amount.
Spread betting has moved outside the ambit
Ambit
Ambit means scope or range; a sphere of influence. Boundary.Ambit can refer to:*Ubee Interactive , a producer of cable modem, ADSL, and IPTV products.*Ambit , a literary magazine....
of sport and financial markets (that is, those dealing solely with share, bonds and derivatives), to cover a wide range of markets, such as house prices
House prices
House prices fluctuate over time. For more detailed articles referring to specific economies:- Affordability of housing in the United Kingdom: House prices in the UK- Real estate pricing: House prices in the United States...
.
In a falling stockmarket, financial spread betting can also be used by investors as a means of hedging against predicted losses in a portfolio of shares.
Tax treatment
In the UK and some other European countries the profit from spread betting is free from tax. The UK and some other European countries tax authorities designate financial spread betting as gambling and not investing, meaning it is free from capital gains taxCapital gains tax
A capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property...
and stamp tax
Stamp duty in the United Kingdom
In the United Kingdom, stamp duty is a form of tax charged on instruments , and requires a physical stamp to be attached to or impressed upon the instrument in question. The more modern versions of the tax no longer require a physical stamp.The scope of stamp duty has been reduced dramatically in...
, despite the fact that its regulated as a financial product by the Financial Services Authority
Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
in the UK. Most traders are also not liable for Income Tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
unless they rely solely on their profits from financial spread betting to support themselves. The popularity of financial spread betting in the UK and some other European countries, compared to trading other speculative financial instruments such as CFDs and futures is partly due to this tax advantage. However, this also means any losses cannot be offset against future earnings for tax calculations.
Conversely, in most other countries financial spread betting income is considered taxable. For example the Australian Tax Office issued a decision in March 2010 saying "Yes, the gains from financial spread betting are assessable income under section 6-5 or section 15-15 of the ITAA 1997". Similarly, any losses on the spread betting contracts are deductible. This has resulted in a much lower interest in financial spread betting in those countries.
Financial spread bet example
Suppose Lloyds TSBLloyds TSB
Lloyds TSB Bank Plc is a retail bank in the United Kingdom. It was established in 1995 by the merger of Lloyds Bank, established in Birmingham, England in 1765 and traditionally considered one of the Big Four clearing banks, with the TSB Group which traces its origins to 1810...
is trading on the market at 410p bid, and 411p offer. A spread-betting company is also offering 410-411p. We use cash bets with no definite expiry, or "rolling daily bets" as they are referred to by the spread betting companies.
If I think the share
Share (finance)
A joint stock company divides its capital into units of equal denomination. Each unit is called a share. These units are offered for sale to raise capital. This is termed as issuing shares. A person who buys share/shares of the company is called a shareholder, and by acquiring share or shares in...
price is going to go up, I might bet £10 a point (i.e., £10 per penny the shares moves) at 411p. We use the offer price since I am "buying" the share (betting on its increase). Note that my total loss (if LloydsTSB went to 0p) could be up to £4110, so this is as risky as buying 1000 of the shares normally.
If a bet goes overnight, the bettor
Bettor
A Bettor is a person who makes bets based on particular information, or feeling, on sporting or other events in the hope of gaining financial profit.-Low Vs. High-stake bettors:...
is charged a financing cost (or receives it, if the bettor is shorting the stock). This might be set at LIBOR + a certain percentage
Percentage
In mathematics, a percentage is a way of expressing a number as a fraction of 100 . It is often denoted using the percent sign, “%”, or the abbreviation “pct”. For example, 45% is equal to 45/100, or 0.45.Percentages are used to express how large/small one quantity is, relative to another quantity...
, usually around 2/3%.
Thus, in the example, if Lloyds TSB are trading at 411p, then for every day I keep the bet open I am charged [taking finance cost to be 7%] ((411p x 10) * 7% / 365 ) = £0.78821 (or 78.8p)
On top of this, the bettor needs an amount (AKA collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
) in the spread-betting account to cover potential losses. Usually this is either 5 or 10% of the total exposure you are taking on but can go up to 100% on illiquid stocks. In this case £4110 * 0.1 or 0.05 = £411.00 or £ 205.50
If at the end of the bet Lloyds TSB traded at 400-401p, I need to cover that £4110 - £400*10 (£4000) = £110 difference by putting extra deposit (or collateral) into the account.
The bettor will usually receive all dividends and other corporate adjustments in the financing charge each night. For example, suppose Lloyds TSB goes ex-dividend with dividend of 23.5p. The bettor will receive that amount. The exact amount received varies depending on the rules and policies of the spread betting company, and the taxes that are normally charged in the home tax country of the shares.
Dangers of financial spread betting
According to an article in The Times dated 10 April 2009 approximately 30,000 spread bet accounts were opened last year, and that the largest study of gambling in the UK on behalf of the Gambling Commission found that serious problems developed in almost 15% of spread betters compared to 1% of other gambling. In addition a report from Cass Business School found that only 1 in 5 punters ends up a winner. As noted in the report, this corresponds to the same ratio of successful punters in regular trading.See also
- Bet exchangeBet exchangeA betting exchange is an entity which provides "trading" facilities for retail or bookmaker customers to buy and sell contracts. Contracts are structured as binary options. Some betting exchanges may also offer CFD products...
- BookmakerBookmakerA bookmaker, or bookie, is an organization or a person that takes bets on sporting and other events at agreed upon odds.- Range of events :...
- Financial bettingFinancial bettingFinancial betting refers to the wagering on the price development of a financial instrument at some later date relative to the current price or level of the instrument, against odds offered by a bookmaker...
- Parimutuel bettingParimutuel bettingParimutuel betting is a betting system in which all bets of a particular type are placed together in a pool; taxes and the "house-take" or "vig" is removed, and payoff odds are calculated by sharing the pool among all winning bets...
- Prediction marketPrediction marketPrediction markets are speculative markets created for the purpose of making predictions...
- Point shavingPoint shavingIn organized sports, point shaving is a type of match fixing where the perpetrators try to prevent a team from covering a published point spread. Unlike other forms of match fixing, sports betting invariably motivates point shaving. A point shaving scheme generally involves a sports gambler and one...
- Sports bettingSports bettingSports betting is the activity of predicting sports results and placing a wager on the outcome.-United States of America:Aside from simple wagers such as betting a friend that one's favorite baseball team will win its division or buying a football "square" for the Super Bowl, sports betting is...
- Spread tradeSpread tradeIn finance, a spread trade is the simultaneous purchase of one security and sale of a related security, called legs, as a unit. Spread trades are usually executed with options or futures contracts as the legs, but other securities are sometimes used...
Further reading
- Financial Services Authority, March 2007 review, Spread Betting Review http://www.fsa.gov.uk/Pages/Doing/Regulated/Promo/thematic/spread_betting.shtml