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Spread Betting: The Basics
Page Summary :

This page offers an introduction to Financial Spread Betting, what it is, how it works, what to look out for, as well as some tips for new traders.

How does it work

Spread Betting is a tool that enables traders to profit from both up and down moves on a wide variety of global markets, including -

  • Stock indexes
  • Individual shares
  • Currencies
  • Bonds, and
  • Commodities such as gold, crude oil or even pork bellies
One of the main differences between spread betting and other types of financial speculation is that the profits are 100% Tax-Free.
Spread Betting is flexible
Some of the attractions of spread betting, apart from the tax-free element are -
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Where to get trading help and advice
Which broker to use and why
Simple 2 month training plan to follow
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The difference between Spread Betting and a high street bookmaker - Profits & Losses are open-ended
Spread Betting differs from the fixed odds betting offered by the Bookmakers. For example -
  • A bookie such as William Hill may offer you 10-1 on a certain horse
  • If you place a winning bet of £10 you'll receive £100 profit (plus your original stake)
  • If the bet loses then it's £10, no more

But with spread bets you are not offered odds such as 2-1 or 10-1, instead you bet a stake, usually pounds per point, on the direction of the market in question, either up or down.

For example -

  • You think the FTSE 100 is likely to rise over the next few days
  • The spread bet broker offers a FTSE price of 4202-4204 (this is called the bid-offer spread and is explained in more detail below)
  • You buy at 4204, which is the offer price, betting £1 a point where each point in the FTSE is worth 1, so a rise from 4204 to 4214 = 10 points
  • The market rallies and you sell at 4224
  • Profit on the trade is your stake per point (£1) x the number of points the market moved higher (20)
  • £1 x 20 = £20 (which is also tax-free)
An example of a losing trade
  • You again expect the FTSE will rally over the next few days
  • The spread bet broker quotes a spread of 4202-4204
  • You buy £1 a point at 4204
  • But the market moves declines and so you sell out for a loss at 4180
  • £1 x (24 points) = A loss of £24
The 'Spread' of Spread Betting
Spread Betting companies don't charge commissions but they are not a charity. Instead they make their profit by charging a spread - the difference in price between buying and selling.

Many industries also make their money by charging a spread, for example the second-hand car business. If you want to sell your car, you might take it down to the local garage and perhaps agree a price of £4,000. The garage owner will valet it, fix anything that's wrong and then place it on his forecourt for sale at say £5,000.

In effect, you have sold your car at the bid price.

A week later somebody walks past the garage sees the car for sale and pays £5,000. The buyer paid the offer price and the garage owner makes the spread of £1,000 minus costs.

A spread bet broker acts in a similar fashion -

  • The bid price - The price where clients can sell
  • The offer price - The price where clients can buy

For example - the FTSE 100 index might be quotes at 4100 (bid) - 4102 (offered)

Spread betting enables you to profit from falling prices (short selling)

By using spread bets a trader can also bet on falling prices, this is called short selling. For example -

  • You are bearish towards the FTSE 100 expecting lower prices
  • The spread bet broker quotes 4202-4204 and you sell £1 short on the bid price at 4202
  • The market falls and is now quoted at 4180 - 4182
  • To buy back the short position you'd pay the offer price of 4182
  • Profit is therefore 4202 - 4182 = 20
  • £1 x 20 points = £20
An example of a losing short trade
  • The broker again quotes 4202 - 4204 and you sell short £1 of the FTSE at 4202
  • But the market rallies with the quote at 4218-4220
  • To buy back your short you'll pay the offer price of 4220 for a loss of 18 points (4202 - 4220)
  • £1 x (18 points) = minus £18
Different months and different timescale bets
Spread bets allow you to speculate on different markets, perhaps the FTSE 100 index or Gold, and with different timescales. For example, one trader might want to bet on the FTSE's performance over the next month while another is very short term and only interested in trading from the opening bell till lunchtime.

This means you'll often see different quotes for the same product. For example -

  • The FTSE 100 Daily bet (often called a rolling cash bet)
  • The FTSE 100 weekly bet
  • The FTSE 100 quarterly bet

So which bet to use? Well, the clue is in the name so -

  • For day trading - Use the daily bet
  • For a trade of between 1-5 days - Use the weekly, and
  • For a trade of 1 week to a few months - Use a monthly or quarterly bet
Slightly different prices will be quoted
As you can see below the 2 spread bet markets for the FTSE 100 quote slightly different prices -
  • FTSE 100 Daily Cash bet quoted at 4346-4348
  • FTSE 100 June quarterly bet trading at 4322-4328

This is because of the way the bets are financed, as spread betting uses leverage. Leverage is where you only have to put up a small deposit, usually around 10%, to control the full value of an asset. For example -

  • If you call up a regular stockbroker and buy £1,000 worth of Marks & Spencers shares you'll have to deposit the full £1,000
  • But if you bought the same position using a spread bet you'd only have to put up around £100 and theoretically the balance would be lent to you - called a financing charge
So you won't have to apply for a loan from your broker. Instead he'll add the financing charge to the quote which is why in the above example there's a big difference between the FTSE daily bet (quoted at 4346-4348) and the Quarterly bet (4322 - 4328).
Don't get bogged down in theory - it won't help
It's my view that the theory of spread betting, what goes on in the background etc is a waste of time to properly understand. And I doubt more than 5% of the planet's spread betters could clearly explain it properly.

Knowing the maths and finer points behind how a spread bet is priced won't help you make any more money, nor will it lose you less. What will define whether you're a success or not is an account balance that grows - so concentrate all your efforts on where the market is going rather than what goes on behind the scenes.

Finally, realise that a spread bet broker will quote all their clients the same price, so even if you're new to the game you'll be offered the same dealing quote as the larger and more experienced traders. And if the professional traders are happy to deal at the current price so should you be.

Tip - There are no stupid questions

If you're ever unsure of what type of spread bet to trade (Daily/Weekly/Monthly/Quarterly) then call your broker's helpline and ask for guidance.

They can't give trading advice, ie suggesting you buy or sell the market, but they can suggest which market to use for your own trading idea.

Remember there are no stupid questions when your money is involved. So don't be scared to ask what you might think is a simple one.

Would you rather for example ask a 'stupid' question where the answer saves you £200 or not ask and lose £200? In such a case the question was an intelligent one.

LearnMoney comment:
Spread betting is a great trading tool for those involved in the financial markets as it's -
  • Flexible
  • Relatively inexpensive to trade
  • One single account can be used to trade a myriad of different instruments
  • The online trading platforms are on the whole excellent, and of course
  • The profits are tax-free.

However, spread betting offers traders leverage so all profits and losses are magnified. And as I mention of the advantages and disadvantages to spread betting page leverage can be both your best friend and worst enemy.

For the new trader the best advice I can give is to make sure you fully understand what you're doing before you get heavily involved. Spread betting is not particularly sophisticated but there are enough subtitles and nuances to fox people just starting out. Experience is therefore important.

WARNING! - Spread Bet Broker Advice

There are good spread bet brokers and there are bad ones.

Having a good broker won't guarantee you profits but a bad broker will probably lead to losses as a combination of their gamesmanship and suspect software takes its financial toll.

So who do I recommend?

Simple, the 2 brokers I personally use for my own spread betting (and I've used them for years) -

FREE Report : How to Learn Spread Betting and Prosper
How to build the all-important trading experience
Where to get trading help and advice
Which broker to use and why
Simple 2 month training plan to follow
Download the FREE report
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