How Does Betting Spreads Work?

In general, betting spreads work by taking the winnings from a winning hand (the minimum bet in a single wager) and adding to it the winnings from a losing hand (the maximum bet in a single wager). For example, if you are playing Texas Hold ‘Em and you have a winning hand that’s worth $40, you would get that $40 added to your winnings from the $20 you had in your losing hand, resulting in a total of $60.

The bet spreads function of online poker is pretty self-explanatory. For example, if you are playing Texas Hold ‘Em and you have a winning hand that’s worth $40, you would get $40 added to your winnings from your $20 losing hand, resulting in $60. However, this is an expensive way to gamble since you are risking your entire bankroll (or the money you are allocating to play with).

Luckily, there is another way to bet spreads that is a little less risky and a lot more cost-effective. You can use CFD (Contracts for Difference) to bet on the spread. CFDs give you the benefit of both worlds; you get the security of a wager while avoiding the risk of full ownership.

The Basics Of CFD Trading

Just like any other financial derivative, CFDs are a contract between two parties (the buyer and the seller), in which one side (most often the buyer) agrees to pay the other (most often the seller) a certain amount of money or a pre-determined amount of money at a certain time in the future. In most cases, CFDs expire (i.e., end) either when the contract is settled or when a set time period has elapsed. In the case of CFDs on financial products (e.g., stocks, indexes, commodities, etc.), the contract is settled once the financial product has reached a certain price or when a certain amount of time has elapsed.

There are several key differences between investing in a corporation’s stock and investing in a commodities future or currency future. First, you are typically buying a contract, not an individual share; this means that you are not actually owning a percentage of the company. Second, you are not paying for shipping and handling fees (in the case of investing in commodities or currency futures); these are all taken care of by the exchange on which the contract is settled. Third, you get the reassurance of a contract, not market share or leverage; because CFDs are legally binding, you know you are in the right place financially if the other party to the contract cheats, malfounds, or disappears. Fourth, you are protected from extreme price movements in the short term; because CFDs are derivatives, they are subject to credit rating changes and additional fees that may apply.

How Do You Use CFDs?

As a consumer, you can purchase CFDs through your financial intermediary (e.g., bank or brokerage house), online poker sites, crypto-currencies such as Bitcoin, and digital wallets such as Jaxx or Google Wallet. Keep in mind that CFDs are not limited to consumers; professional traders use them for the same reasons, with some key differences.

Most importantly, CFDs do not require you to speculate on the price movement of a single asset (e.g., stock, commodity, etc.). Instead, you can choose from an entire portfolio of bets that are pre-set up by a professional trader or invested by you individually. This is a major advantage for those who want to actively trade the markets but do not have the time to constantly be monitoring the price of individual assets. With a CFD, you can simply choose which bets you want to participate in and have your broker do the rest; in the case of an auto-fill tool such as MetaTrader 4 or Expert Advisors such as Renaissance Technologies’ MetaInvestor, this reduces the amount of time you need to spend manually analyzing charts and making trades.

As a consumer, you can also set up rules-based CFDs that automatically create trade orders for you when certain conditions are met. For example, say you have a long position in the S&P 500 and an equal position in gold (i.e., 50/50 mix), and the S&P 500 is at an all-time high while the price of gold is at an all-time low. In this case, your rules would tell your broker to automatically sell the S&P 500 and buy gold, resulting in a winning trade. This kind of strategy can result in serious gains if deployed correctly, but only if the market conditions are right for it to work. Most importantly, you can use technical analysis tools to find the right opportunities in your favor.

How Do Professional Traders Use CFDs?

As a professional, you can use CFDs for three primary purposes: hedging, limit-testing, and leveraged buying. A quick refresher on how these work:

  • Hedging: Hedging is the practice of offsetting or reducing any price swings in your favor in one market (e.g., the S&P 500) by entering into a contract to achieve the same result in another market (e.g., gold).
  • Limit Testing: Limit testing is the practice of placing a limit on how much you will wager in a single financial transaction. For example, say you have a $10,000 monthly budget and you want to invest $2,000 in the S&P 500. You can open a CFD for the S&P 500 with a $10,000 credit balance and a $2,000 limit on your bankroll. In this case, your bet is limited to $2000/week ($10,000 X 2 = $20,000/month limit), which is equivalent to two weeks of average S&P 500 performance in one month. This strategy reduces your risk of loss and gives you the flexibility to monitor the performance of the S&P 500 without risking your entire bank account. Your credit balance can be adjusted to achieve the same effect.
  • Leveraged Buying: Leveraged buying is the practice of investing in stocks, commodities, or other financial products that are on, above, or near an important historical price level; this is also known as’shorting’ the given product.

In general, the risks involved in CFDs are a function of the amount of money you are willing to lose. The more you wager (i.e., the more you put on the line), the greater the potential risk. However, like any other form of gambling, the more you wager, the more you will invariably win. Therefore, it’s a question of how much you are willing to risk versus how much you are willing to win. If you are new to CFDs, start small and work your way up; most importantly, do not put all of your savings on the line at once. In the case of crypto-currencies, store your funds in a hardware wallet or paper wallet and keep your crypto-currencies in a safe location; this is especially important if you are going to be using them for gambling purposes.