Spread Trading Guide

Trading

A guide to Spread Trading including a comparison of the key financial markets and where you can trade:


Where Can I Open a Spread Trading Account?

There are a number of financial spread trading companies which provide thousands of markets. Firms like Financial Spreads offer many of the advantages of financial spread trading including tax free trading*, no commissions, no broker’s fees and out of hours trading.
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Web Platform Spread Betting Accounts Spread Betting Accounts Spread Betting Accounts Spread Betting Accounts
Mobile App(s) iPhone App iPhone App iPhone App iPhone App
iPad App iPad App iPad App iPad App iPad App
24 Hour Trading 24 Hour Trading with Financial Spreads 24 Hour Trading with City Index 24 Hour Trading with ETX Capital 24 Hour Trading with CMC Markets
Live Charts Financial Spreads City Index ETX Capital CMC Markets
Stop Loss Available Financial Spreads Stop Loss Orders City Index Stop Loss Orders ETX Capital Stop Loss Orders CMC Markets Stop Loss Orders
Automatic Stop Loss Automatic Stop Loss on Financial Spreads Trades Automatic Stop Loss on City Index Trades Automatic Stop Loss on ETX Capital Trades Automatic Stop Loss on CMC Markets Trades
FCA Authorised and Regulated Financial Spreads City Index ETX Capital CMC Markets
Comparison Notes.


Advantages of Spread Trading

Financial spread trading offers several advantages over more traditional investment options including:

  • Investors can trade on a significant number of markets from the highly traded FTSE 100 Index and Sterling / Dollar foreign exchange rate, to the less popular markets like Copper, Dollar / South African Rand and the Brazilian Stock Market Index.

  • Unlike normal share trading, investors can take short positions. Spread trading lets you place trades in either direction. This means that if your research leads you to think that the price of Gold is going to increase then you can spread trade on it to move higher. On the other hand, if you think that the Dax 30 is likely to struggle then you can spread trade on the market to go down.

  • Financial spread trading is not subject to tax*. There is no actual exchange of any stocks or shares; instead you are simply speculating on the future market value.

  • If you are trading stocks and shares then you will normally incur broker’s fees or commissions. Spread trading is different, your trades are not subject to these costs.

Spread Trading Example

If you decide to speculate on an index such as the FTSE 100 then, on visiting a financial spread trading website, you might find the current spread of 5417.3 – 5418.3.

That means you could speculate on the FTSE 100 to go:

  • above 5418.3, or
  • below 5417.3.
When spread trading, investors trade on every unit the market goes up or down. Specifically, for the FTSE 100 market a unit is 1 point of the index’s price movement.

With this example, you could choose to speculate £2 for every point the FTSE 100 increases or decreases.


Speculating on a Market to Increase

If you bought the FTSE 100 at 5418.3 and the index went up then you might see the spread move to 5468.3 – 5469.3. If this were the case, you might decide to close your position for a profit at 5468.3.

Profit or Loss = (settlement price of the market – opening price of the market) x stake per point
Profit or Loss = (5468.3 – 5418.3) x £2 per point stake
Profit or Loss = 50.0 points x £2 per point
Profit or Loss = £100.00 profit

On the other hand, if the market had moved down to, as an example, 5372.2 – 5373.2, you might decide to close your position to prevent further losses. In that case, you would sell back at 5372.2.

Therefore, with the same £2 per point stake:

Profit or Loss = (settlement price of the market – opening price of the market) x stake per point
Profit or Loss = (5372.2 – 5418.3) x £2 per point stake
Profit or Loss = -46.1 points x £2 per point
Profit or Loss = -£92.20 loss


Speculating on a Market to Decrease

A useful benefit of financial spread trading is that investors can go short of the markets.

The original market was 5417.3 – 5418.3.

If you were to sell the FTSE 100 at 5417.3 and the index decreased then the spread could become 5371.3 – 5372.3. If so, you might want to close your trade for a profit by buying at 5372.3.

Profit or Loss = (opening price of the market – settlement price of the market) x stake per point
Profit or Loss = (5417.3 – 5372.3) x £2 per point stake
Profit or Loss = 45.0 points x £2 per point
Profit or Loss = £90.00 profit

Markets can also rise, if the market were to rise up to 5457.7 – 5458.7, you might want to close your position to prevent further losses. Assuming this was the case, you would buy at 5458.7.

You would do this with the same £2 per point stake:

Profit or Loss = (opening price of the market – settlement price of the market) x stake per point
Profit or Loss = (5417.3 – 5458.7) x £2 per point stake
Profit or Loss = -41.4 points x £2 per point
Profit or Loss = -£82.80 loss

Financial Spreads FTSE 100 Rolling Daily prices quoted as of 13-May-10.


Where Can I Find Free Spread Trading Charts?

All firm give you free live candlestick charting packages.

With 99% of these you can also apply a variety of moving averages, alter the timescales to show 1 minute charts, 1 hour charts, 1 day charts etc.

Spread Trading and the Stock Market

Below we compare the spreads and minimum trade sizes for a range of major stock market indices.

This list is not meant to be inclusive; spread trading services are also available with other companies. Each of the firms listed below is authorised and regulated by the Financial Conduct Authority.

Typical In-Hours Spread Sizes
FTSE 100 (UK 100) Daily 0.8 1 1 2
Dow Jones (Wall St) Daily 1 1 1 1.4
DAX 30 (Germany 30) Daily 1 1 1 1
S&P 500 (SPX 500) Daily 3 4 5 5
NASDAQ 100 (US Tech 100) Daily 5 4-10 3 1
CAC 40 (France 40) Daily 0.8 1 1 1
ASX 200 (Australia 200) Daily 1 5 3 1
Japan 225 Daily 8 8 13 5
Hong Kong Daily 8 10 20 7
Stock Indices – Minimum Stake £1 £1 £0.5 £1
Comparison Notes.


For more information, examples and up to date news on popular spread trading markets see:


Financial Spread Trading and Risk Management

Naturally, as with all types of investment, be it on Stocks and Shares, ETFs, pensions etc, there is a negative side and with spread trading you need to be careful because you can lose more than you initially invested.

The following warning also reveals some other points to think about, ‘ensure that financial spread trading matches your investment objectives. Make sure you familiarise yourself with the risks. Spread trades do carry a high level of risk to your capital. Seek independent advice where necessary’.

That said, investors can put limits on their trades where the limits help to restrict their losses without impacting their upside. You can also employ smaller stake sizes such as £1 per point or $1 per point.

As discussed in the example above, to gain a little exposure you could simply trade European, UK or US Stock Market Indices, ie speculate on whether the FTSE 100, Dax 30, CAC 40, Dow Jones etc will go up or down.

With any of these, as mentioned, you can trade £1 per point or $1 per point etc. If you speculate on the Dow to go up, with a £1 per point stake, and it goes up by 100 points then you would make 100 points x £1 per point = £100.

Note that you can trade the markets in Dollars, Sterling or Euros. If you want to trade in Dollars then 100 points x $1 per point = $100.

Of course, should the market move against you, dropping by say 80 points, then with a £1 stake you would lose 80 points x £1 per point = £80.

Obviously this would be a fairly poor start. However, with firms like Financial Spreads you can add a Stop Loss at let’s say, 30 points.

If you were spread trading on the Dow this would mean that your trade would be closed if the Dow moved against you by 30 points. Therefore, instead of losing £80, you’d only lose 30 points x £1 per point = £30. (Not all Stop Losses are guaranteed).

Of course, if you correctly predicted the direction of the market then you would still make a profit of £100 if it moved 100 points or £50 if the Dow moved 50 points.