In the stockmarket, when you want to deal in traditional shares, you go to a stockbroker and he will quote you two prices.
The lower of the two prices, which is the one you will get if you are selling shares, is called the bid price.
The higher quoted price is what you will have to pay if you are buying shares, and is the offer price. The difference between the two prices is called the 'Spread'.
In spread betting the principle is exactly the same, two quoted prices, bid and offer.
If you believe the share (or index, commodity or other market) will go up, you buy at the offer price - the higher of the two prices quoted.
If you believe the share is going to go down your bet will start at the bid price - the lower of the two figures.
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When you place your bet you will be asked to say how much you want to wager on a per-point or per penny. For example if you were betting on a UK share in say "£10" you stand to win, or lose, £10 for each penny the UK share price changes.
Top tip for beginners: £10 may not sound a lot but always remember you stand to make or lose this for every penny a stock may change. If a share suddenly soars or slumps on an announcement, you will soon be sitting on a large gain or a large loss. If you are new to this game, start small and build from there.
This bet stands until you choose to close it - by for example going back to your spread betting broker and taking the latest bid (selling) or offer (buying) price available. Another handy tip is that you can use a stop loss, where you don't have to watch the market every second, but can set-up a price at which you automatically close out the bet.
Still a bit confused? We realise that the concept may be a bit difficult to get your head around but a few simple examples will help.
The reality is that if you understand what you are doing, spread betting is no scarier than trading through a normal broker. And once you do 'get' spread betting you will wonder why you didn't think of using it sooner.
One of the major features of spread-betting is that any gains you make are currently free of capital gains tax.
Scenario 1 for the Vodafone fan
You hear a whisper, read a news item, see a new phone model, whatever - something starts the old brain cells jingling and, after thoroughly researching the situation, you believe the Vodafone share price is currently under-valued. You believe the price is going to go up in the near future.
The Spread price quoted is 136 - 137 and you decide you want to wager £10 per point. Your bet starts at the 137 price.
Two weeks pass and the Vodafone Spread price has risen to 156 - 157. Gadzooks! You were right, what a clever bunny you are. Also, as you are not a greedy bunny, you decide to close the bet. The payout is based on the 156 figure, which means you have a 19 point increase which, at £10 a point equates to £190. Not a bad profit in two weeks.
BUT LET'S JUST SUPPOSE....
Scenario 2 for the Vodafone fan
Same situation. You fancy Vodafone and believe the 136 - 137 Spread undervalues the stock. You wager £10 a point and your bet starts at 137.
Oh dear! Fickle Mr. Market has confounded your confident prediction. The Vodafone price has dropped to 116 - 117, which triggers your 15 per cent stop loss. Your bet is automatically closed which means you have to sell at 116 so you have lost 21 points at £10 a point, a total of £210.
The only good news here is that you arranged an automatic stop loss, thereby limiting your potential losses. (Triggered stop losses mean you sell at the next best price.)
Scenario 1 for the Vodafone sceptic
You've heard a whisper, read a news item, looked at the new phone model, whatever - and you just don't fancy Vodafone. You do more research, look at the up-coming competition and it confirms your gut feeling. You believe Vodafone, with a Spread of 136 - 137 is over-valued.
You place a bet on the Vodafone price going down, £10 a point, starting at 136.
Two weeks later it's bad news for Vodafone, good news for you. The price has dropped and the Spread is now 116 - 117. You close your position at 117, a profit for you of 19 points at £10 per point, £190.
But let's just suppose....
Scenario 2 for the Vodafone sceptic
Same situation. You have taken a long hard look at Vodafone and you are not impressed. With a spread of 136 - 137 you think the share is overvalued and will go down in the not-too-distant future.
You place your £10-a-point 'sell' bet and sit tight. The clock starts ticking at 136.
Calamity! Suddenly the market loves Vodafone and the price rises to 155 -156. Your 15 per cent Stop-Loss kicks in, and your bet is closed at 156. You owe the man £200.
(You will notice that in this scenario we added 19p, not 20p, to the spread price. That's because a 15 per cent Stop-Loss would have been triggered at 155 - 156).
Spread betting is not a way of trading shares. It’s leveraged gambling on the price movement of shares. Say you bet 1 Pound a point on AIB, current price 1800, and it goes up to 1825. You close your bet and you win (1825-1800) * 1 = 25 Pounds. If you bet 10 Pounds a point and the share goes from 1800 to 1825 you win (1825-1800) * 10 = 250 Pounds. You don't pay the full cost of the share, just the IMR, say 60 Pounds, which is a deposit on making the bet. The downside to this is that you can lose more than you bet. For example, if you bet 10 Pounds a point on Elan at 2240 and the shares were to drop to 240 you lose (2240-240) * 10= 20,000 Pounds. You’re not betting against the spreadbetting the way you bet against a traditional bookmaker. Instead the spread betting company charges a ‘spread’ (i.e. a buy and sell price for each share) on each bet. The buy is always more than and the sell always less than the market price. This is how they make their profit, as they take money on both winning and losing bets. You win at the expense of those who lose as it’s a zero-sum game.
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