Spread Bet

A spread bet quotes a price with a bid and an offer and you stake an amount per point of movement. Buy an index at 7,802 at £10 a point; it reaches 7,850; you make 48 × £10 = £480. It falls to 7,750 and you lose £520.

Three features define the product and all three are hazards:

• You never own anything. There is no share, no future, no contract with an exchange. It is a private wager with the provider, who is your counterparty.
• Leverage is extreme. A few percent of the position's value as margin means a small adverse move consumes the deposit.
• The provider sets the price. Their quote includes a spread wider than the underlying market's, and that spread is the cost of the product.

In jurisdictions where it is treated as gambling, winnings may be untaxed and losses are not deductible. That tax treatment is the product's entire reason for existing — and it is specific to certain countries, subject to change, and not a reason to trade.

The cost structure

• The spread is the main charge and it is embedded, not billed. A one-point spread on an index quoted at 7,800 is about 1.3 bp per side — modest, until multiplied by leverage and turnover. Run it through the trading-cost calculator at the *leveraged* notional, not at the deposit.
• Overnight financing accrues on the full position size for daily-funded bets — the leverage is borrowed and the borrowing is charged.
• Guaranteed stops cost a premium and are the only stop that survives a gap. An ordinary stop is a request, not a guarantee.

What the regulators found

Those loss percentages are published by the firms themselves under regulatory requirement. They are the single most informative number about this product, and they are consistent across providers and years.

Where the provider's revenue comes from

Providers internalise most retail flow — netting one client's long against another's short and hedging only the residual in the real market. The economics follow directly:

• The first two terms are a genuine service business. The third means the provider profits when unhedged clients lose — a conflict that is disclosed, regulated and real.
• Firms with well-run risk management earn most revenue from the first two. The 2015 Swiss franc break is the cautionary case for the third: gapping through stop levels left several providers with client debts they could not collect, and one large firm required emergency funding.

Why the loss statistics are structural, not a skill problem

• The cost hurdle scales with leverage. At 100× gearing, a spread costing 1.3 bp of notional is 1.3% of the deposit per round trip. Trading frequently at that ratio is arithmetically difficult to survive.
• Position sizing is the failure mode. Deposit-based thinking ("I risked £500") ignores that the position behaves like £78,000. The risk-based sizing tool exists to invert this: decide the loss you can accept, then derive the size.
• Gaps defeat stops. Overnight and weekend moves skip the stop level entirely; the fill is wherever the market reopens. This is the risk that guaranteed stops price, and it is the one most users assume away.

The honest comparison

Against a CFD: identical economics, different tax and legal wrapper. Against an exchange-traded future: the future is centrally cleared, transparently priced and has no single counterparty — genuinely better plumbing, at larger contract sizes. Against an option: the option's loss is capped at the premium, which is the one structural protection none of the leveraged linear products offer.

The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.