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The 'Spread' of Spread Betting

Spread Betting companies as we have mentioned charge their clients no commissions, instead they make their money by earning the difference between the bid-offer spread that they quote on each financial product. The spread works in a similar fashion to how a market maker in the cash market operates.

• Or to look at another way the spread works the same as a second hand car dealer
• You sell him your old car for £2,000 (the bid price)
• The dealer then advertises it in his showroom at £2,500 (the offer price)
• The £500 difference is therefore his profit (minus costs of course)

A spread bet broker will always quote a two-way price. The bid price at which spread betting clients can sell at, and the offer price which they can buy at. For example, on the FTSE 100 index the spread may well be 4100 - 4104, or 4100 bid, 4104 offered.

Buying The Market - Going Long

The Offer Price

Current market on FTSE 100 spread bet : 4100 - 4104

• If you wanted to go long (or bet on potential higher prices) the FTSE 100 index then you would be a buyer of the spread on the offer price of 4104
• You would simply state the amount per point that you wanted to go long, for example £1 a point
• The order would therefore be 'buy £1 of the FTSE 100 index at 4104'

Normally you'll find that the minimum bet size on any financial spread bet is £1 a point but this can differ from spread bet broker to spread bet broker.

Selling The Market

The Bid Price

In the above example if you bought £1 of the FTSE 100 at 4104 and wanted to take either your profit or loss you would contact your spread betting broker to get a quote on where the market is, perhaps 4115 - 4119. The market has clearly risen so in order to take your profit you would now sell on the bid price, or 4115.

The profit earned on this example would therefore be the difference between where you bought the index (4104) and where you sold (4115) multiplied by your stake of £1 a point. Total profit is therefore 11 points or £11.

But what happens if you got it wrong and the index fell? In order to get out of the trade you'd still have to sell at the broker's bid price with him quoting a spread of perhaps 4090 - 4094. So by selling at 4090 your loss would be 14 points multiplied by your £1 stake, or £14.