What Is Spread Betting?
- It is a relatively simple way of allowing you to bet on shares / markets without owning any stocks
- Financial spread betting is predicated on some basic principles:
- If you think that a financial market will rise in value, then you can bet on the value of the market going up. This is called "Buying" or "Going Long"
- If you think that a financial market will fall in value, then you can bet on the value of the market going down. This is called "Selling" or "Going Short"
- Profits and losses will then vary depending upon how much the markets move up or down
Buying (Going Long)
You Buy a financial market / product that you believe will rise in value. If in due course your prediction is right, and the value does increase, you can make a profit.
If you are incorrect and the value of the market / product falls, you will make a loss.
Selling a falling financial market or product
You Sell a financial market / product that you believe will fall in value. If in due course your prediction is right, and the value of the market / product does fall, you can make a profit.
If you are incorrect and the value of the market / product rises, you will make a loss.
What is Spread Betting?
- Spread betting is an alternative to buying specific stocks. You are simply speculating on the direction of the future price movements in an underlying market. ie you bet on whether you think the market will rise or fall
- It's a simple way of trading on non-share based markets such as commodities, forex or interest rates
- It is a cost efficient way of investing that is Tax Free*
- It allows you to trade on the movement of stocks and shares without using a stockbroker, therefore you do not have to pay commissions or fees
What is Spread Betting - FTSE 100 Dec Example
On a spread betting company website - you may see the following information:
ie a FTSE December contract is priced at 6370 - 6380 points. You could:
||FTSE 100 - Dec
Note that you don't have to keep a position open until the contract expiry date, you can close out your position earlier.
- Buy at 6380 points if you thought that the FTSE 100 index would finish above 6380 points on 15 December (Expiry date of the contract), or
- Sell at 6370 points if you thought the index would finish below 6370 on 15 December.
How do I Spread Bet?
Taking the above example, if you think the FTSE is buoyant and only going up then you would Buy at 6380 for a Stake per Point eg Buy the FTSE at 6370 for £2 per point of movement.
Let's say the market goes up and the FTSE settles at 6398.
Your profit is calculated by taking the difference between the closing level (6398) and the opening price (6380) and multiplying that by your stake.
Profit = (6398 = 6380) x £2 per point stake
= 18 points x £2 per point = £36 profit
However had the FTSE gone down and closed at 6374, you would have lost.
Loss = (6374 - 6380) x £2 per point stake
= -6 points x £2 per point = £12 loss
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What is Spread Betting - Can I Limit My Risk?
To limit your risk, you can place a Stop Loss when you open a new position (ie when you place a new bet). If the market moves rapidly against you and the market hits your Stop Loss level your bet is closed and your losses are limited. Note that there are different rules with different firms, with some firms you can specify where to put the Stop. Some firms will not guarantee your Stop Loss and may close your bet at a different level. Always check the rules before you trade.
Also see Spread Betting - Stop Losses.
What is Spread Betting - for more information see:
Risk Warning: Spread betting and CFD trading carry a high level of risk to your capital and you may lose more than your initial investment. Spread betting and CFD trading may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
'What Is Spread Betting?' by DB, updated 07-May-13
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