A Beginners’ Guide to Spread Betting
Posted by Harry Kane on Monday, May 24, 2021
In a previous blog post, we’ve talked about the inherent links between gambling and investment, from the requirement to stake capital in the pursuit of profit to the importance of managing of risk in real-time.
The broader relationship between these two entities is further embodied by spread betting, which is a derivative trading and wagering technique that’s entirely speculative and incredibly popular across a wide range of assets and marketplace.
In this post, we’ll explore the concept of spread betting further, while asking how you can use this you advantage as a sports bettor.
Then and Now – The History of Spread Betting
Did you know that some of the major Wall Street firms started out life as bucket shops? Today, this term refers to brokers that sell pump and dumps stock in a highly pressurised operation, but during the early 1900s this was simply a rudimentary stock exchange and trading pit.
In fact, you could stroll into a bucket shop off the street, before making a deposit (or securing a viable line of credit) and speculating on the price movement various New York Stock Exchange (NYSE) stocks such as Union Pacific.
You could spend as long as you like in these shops and buy or short sell anytime your wanted, before collecting your profit or licking your wounds at the end of the trading day.
Bucket shops arguably housed the first ever iteration of spread betting, but it wasn’t until 1974 that this became an official practice in the financial marketplace. At this time, it was illegal for British citizens to trade gold purely for speculative purposes, so IG-founder Stuart Wheeler developed the notion of trading the price of the precious metal as an index.
During this period, a select group of people would meet to ‘fix’ the prices at which gold bullion could be bought or offered for sale by institutional investors and companies.
These prices remained place until the subsequent meeting, so Wheeler’s newly developed market created a buy and sell price where he thought the next fix would be set.
Known as the ‘Investors Gold Index’, this represented a simple iteration of the spread betting system that we know and love today. Namely, those who thought the price of gold would be above Wheeler’s placed a ‘buy’ bet, whereas those who expected the price to fall would commission a ‘sell’ bet.
Thanks to the immense success of this index, others spread betting providers and brokerages began to crowd the market in the early 1980s.
This triggered sustained growth in the burgeoning marketplace, although this was still relatively restricted to a small and exclusive population demographic (namely established institutional investors).
In fact, spread betting companies only created prices for currencies, options, commodities and a handful of major indices, rather than more popular and accessible asset classes like stocks and bonds.
Spread betting during the 80s was also restricted by limited technology, as investors were unable to acquire information on the underlying markets or capitalise on volatility and price movements in real-time.
Remember, the information pertaining to specific spreads must be communicated to traders immediately if they’re to realise a profit, otherwise investors would risk executing a bet on the spread after it has already changed.
This began to change in the mid-1990s, when the world’s financial markets were caught in the beginning of a technology boom.
More specifically, the proliferation of computers and Internet connectivity made it easier for tech-savvy individuals to access the markets and find relevant information relating to specific spreads, helping the practice to cross all fiscal marketplaces including shares and futures.
It was at the turn of the century that spread betting truly entered the mainstream, however, following the bursting of the so-called “dot.com” or technology bubble in March 2000. Interestingly, this was directly linked to the tech boom of the mid to late-90s, which prompted excessive speculation of Internet-related companies during the same period.
This event created a general bear market that until 2003, which in turn helped to popularise spread betting as investors sought out ways of speculating and capitalising directly on specific market downturns.
Around the same time, spread betting companies began to reimagine themselves as online brokerage sites, which served as viable platforms through which investors could analyse historic data, review up-to-date quotes and execute trades in real-time.
Such entities also did battle with one another online by offering increasingly competitive spreads, while utilising risk management tools such as stop-losses (which sought to automatically close speculative and leveraged positions once they’d incurred a predetermined level of loss).
This has triggered a dramatic increase in daily trading volumes across a range of speculative markets, with forex offering a relevant case in point.
In this market, where investors can trade currencies as derivatives and speculate on price movements without assuming ownership of the underlying financial instruments, an estimated $6.6 trillion is now traded on a daily basis across the globe.
As a result of this significant and sustained evolution, spread betting is now widely used to speculate directly on volatile price movements and optimise profitability during periods of economic tumult (such as during the great recession and the coronavirus pandemic).
But where do sports spread betting come into play? In simple terms, sports spread betting adopts a similarly closed system, as there often isn’t an infinite number of possible results for any given betting slip selection.
A sports betting firm will typically offer a spread price around what it thinks is the most likely result, with this principle applied to numerous markets aside from outright winners and losers of a particular game.
For example, let’s say that you’re a cricket fan and you want to bet on how many runs Australia will score against England in a one-day international match. If form and historical data indicates that 330 would be a likely score, the platform will offer a spread between 320 and 340. So, you can ‘go low’ by selling at 320 or ‘go high’ by buying at 340, depending on how you see the game going.
You may sell if you expect a relatively low-scoring game, for example, as selling at 320 will deliver a generous payout if Australia scores 220. If the score is 320 or above in this instance, however, you’ll lose the wager and more than the total stake that you committed.
This works in a similar way to the traditional spread betting, which is clearly an increasingly innovative practice that can trace its roots back to the beginning of the 1900s.
This fusion of an age-old market philosophy and contemporary sports betting practices certainly makes spread betting a popular investment vehicle, and one that has become increasingly lucrative throughout the digital age.
Sports Spread Betting – How it Differs from Fixed-odds Betting
Another way to describe sports spread betting is as a way of wagering on the outcome of an event or match, where you bet against the spread provided rather than fixed odds.
So, the amount that you bank depends on both your stake amount and how right you were about the direction of travel, whether this refers to a winning margin or the total number of goals scored in a football match.
While this enables you to increase your potential gains according to the accuracy of your spread bet, however, you can also incur losses that are far in excess of your original stake when things go spectacularly wrong.
This makes spread betting an attractive proposition for risk-hungry and experienced sports bettors, while it has also evolved over the years to tempt novices and traditional punters to participate in the marketplace.
But how else does the sports spread bet differ from fixed-odds wagers? Well, apart from enabling you to buy or sell at a higher or lower price respectively, the amount that you win correlates directly with the margin by which you beat the spread.
With sports spread betting, you can also bet on the index of points allocated to events that occur, with this similar to the original investment system created by Stuart Wheeler way back at the turn of the 20th century.
Interestingly, you’re also able to close out and claim a profit during a selected event if the market starts to move in your favour. This will depend on the discretion of your sportsbook, but it affords you the freedom to claim at least a small profit if you suspect that the market will move against you before the end of the event.
The same principle applies if the market moves heavily against you early in the event. If you think that this position is irredeemable or likely to get worse, you could close out for a minimal loss and safeguard your bankroll in the process.
Of course, it’s right to say that spread betting on sport is rather more complicated than fixed-odds betting, but you can cut through some of this confusion simply by understanding the core principles and mechanisms that underpin the former.
How to Make Spread Betting Work for you
Now that you have a basic understanding of sports spread betting and its origins, you may feel ready to place your first wager on a specific match or event.
To help you on your way, we’ve outlined some helpful hints and tips below, so that you can wager responsibly and make the most of your hard-earned bankroll!
1. Work Out the Worst-Case Scenario
Whenever we place any type of sports betting, we’re often focused on our potential returns and gains. With sports spread betting, however, you’ll also need to calculate the worst-case scenario, particularly as its possible to lose more than your initial stake with this type of wager.
The worst-case scenario will depend on the nature of your bet and the underlying event, but this process should enable you to determine a reasonable stake size and manage your bankroll effectively.
If you’re betting on the number of bookings in a football match (10 points per yellow card and 25 per red card) and were quoted 36-40, a £10 buy-in at 40 would place a total amount of £400 on the line. Conversely, a £1 buy-in would decrease your capital risk to £40 and understanding this allows you to make a truly informed decision.
2. Keep Your Eyes on the Action as it Unfolds!
One of the main appeals of sports spread betting is that it allows for flexible in-play wagering, and potential cash outs as the market moves for and against your bet in real-time.
With this in mind, it’s crucial that you watch the match or even that you’re betting on live where possible, so that you can react accordingly and optimise the impact of your decision making as the action unfolds.
For example, let’s say that you’re betting on the number of goals in a football match and have sold at less than three (in anticipation of a low-scoring game). However, if both sides score in the opening 10 minutes, the market has already begun to shift against you, and if you sense that more goals will be plundered in an open game, you’d be advised to cash out while you have the opportunity.
Of course, you’ll probably be able to receive updates on a particular match online or through your smartphone but watching the action in full will allow for more instinctive and effective decision making based on your knowledge of a particular sport.
3. Focus on Markets Where You Are Informed and Knowledgeable
The latter point leads us neatly onto our final tip, and knowledge of a particular sport or participants is arguably the single most important weapon in any sports spread bettor’s armoury.
This certainly lends itself to more informed decision making (both before the event and in-play), so we’d recommend focusing on sports and markets that you’re familiar with and allow you to utilise your existing knowledge as effectively as possible.
On a similar note, you may want to consider focusing on relatively simple markets that pertain to single matches. Winning margins and the total amount of goals or runs scored in a game offer relevant examples, as it’s reasonable to make accurate wagers in these markets if you’re familiar with the participants, their form and any gaps in quality that may exist.