Can One Make a Profit from Spread Betting?

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Well the answer, as every company which is out there trying to sell you their services, is yes. There is, however, a fundamental fact that you should recognise before you start to risk your money. This is not to say that you should not consider spread betting. If you have a talent it can be very profitable but consider this before you start.

There are 4 stakeholders in every complete cycle of transactions in which you engage, whether it is long or a short position which you plan to take.

They are:

  • You
  • The buyer
  • The seller
  • The spread betting company – the market maker

To illustrate and simplify the principle let us assume that the buyer and the seller are the same person – let call them the “trader”

When you BUY at 100 with a spread of 2 then the trader SELLS at 98. The difference of 2 is the gross profit taken by the market maker.

There are now 3 possible scenarios

You SELL immediately – when the price has not changed

When you SELL you will be paid 98 and the trader will BUY at 100. The difference of 2 is the gross profit taken by the market maker.

The net situation: You have a loss of 2; the trader has a loss of 2 and the market maker has a profit of 4

You SELL when the price has risen – for illustrative purposes let us assume that the market mid price has risen by 5

When you SELL you will be paid 103 the trader will BUY at 105. The difference of 2 is the gross profit taken by the market maker.

The net situation: You have a profit of 3; the trader has a loss of 7 and the market maker has a profit of 4

You SELL when the price has fallen – for illustrative purposes let us assume that the market mid price has fallen by 5

When you SELL you will be paid 93 the trader will BUY at 95. The difference of 2 is the gross profit taken by the market maker.

The net situation: You have a profit of 7; the trader has a loss of 3 and the market maker has a profit of 4

The conclusion is simple. One party, the market maker, is certain to make a profit and that profit is taken directly from the two other engaged parties. Hence if the two parties are equally skilled at identifying market trend then you will win some and lose some. Both of you and the trader will be making a loss and will have created gross profit for your chosen market maker. The market maker then does, of course, have to cover the costs of providing the service so gross profit is no guarantee of a net profit. That is not your concern but does justify spread.

The fundamental fact is that for every completed transaction cycle between you and the trader there is a winner and a loser and that the winner’s gain is less that the loser’s loss.  Hence to make a profit you need to be certain you are much better than the average trader – being average is just not good enough –  and hope there is a consistent supply of “bad” traders who are happy to give you their money

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