Spread betting providers make money from dealing spreads and interest charges. As when dealing ordinary shares or any other asset, these providers always quote you two prices: a lower one at which you can sell and a higher one at which you can buy.

The difference is called the “spread” and it will be based on the market spread. Where commission is not being charged, a bit extra is added to the spread by the provider.

This is a big advantage to trading spread betting compared to horse-racing. I think I’ve already stated somewhere how tough it was to get bets on races. As soon as they see that you know what you are doing, they close you out. Bookies only want ‘mug punters’ or so called ‘recreational clients’, they don’t want professionals. This is not the case with spread betting companies. They don’t care how much money you win and will gladly pay you a million pounds and let you come back for more.

Why?

Because they make their money on the spread of their quotation. They make money if you win and they make money if you lose – it’s virtually the same to them. Your bet that the market is going up is usually balanced by a bet (from another punter) that the market is going down. They couldn’t care less which way it goes or who wins or loses. Bets are covered with excess risk being hedged in the futures markets and they make their margin whatever the market direction. This is good news for spreadbetters like myself. It is very frustrating to be closed out of a market just because you cannot get your bet placed.

Having a spread bet generally also involves daily interest costs. When you do a “buy” trade, the provider charges you interest on its total. Typically, this interest rate is based on LIBOR, plus a mark-up. When you do a “sell” trade, your provider may end up paying you interest on the value of your trade, albeit at a lower rate than they would charge you if you were buying.

Longer-term spread bets trades based on futures contracts don’t carry a daily interest charge, you just pay a wider spread when you buy and sell.

Spread-bet companies make most of their money on the spreads, rollovers and the like. That higher cost of running positions is the downside to spread-betting. The upside is no CGT. (It currently costs me about 3% per annum to hold spreadbet positions, plus I typically lose roughly a further 1% on the spread compared to physically buying and selling shares).