Fact: most spread bettors lose money over time. Fact: spread-betting firms earn good profits. You might logically assume that these two facts were related. But you'd be wrong. Spread-betting firms don't typically make much money because of their punters' form.
If you wager on a sporting event down at your local betting shop, your gains are the bookie's losses, while your losses are the bookie's gains. However, this isn't how spread betting works. Instead, the spread-betting firm tends to make its money from two other sources.
Although you pay no explicit commission when you open and close a spread bet, you pay a higher price to buy and receive a lower price when you sell. At least part of the difference between the two prices - 'the spread' - goes into the spread-betting firm's pocket.
At the same time, you usually have to pay interest on the value of your positions. If you're doing a buy bet on the FTSE 100 worth £50,000 in total, you pay a daily financing charge on that entire amount, typically based on the London inter-bank interest rate.
Charging a bid-offer spread and interest is a low-risk way to make money. It is certainly a lot steadier than going head-to-head with punters, as sports bookies and casinos do. Instead, spread-betting firms are able to balance their clients' bets against each other, so that they make money whatever happens to the markets they offer bets on.
Still, spread-betting firms are not indifferent to their clients' success or failure. Winning clients will keep betting, which means more spread and more interest payable to the firm.
