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A: Financial spread betting is one of the most popular forms of trading in the United Kingdom. Spread betting (sometimes referred to as spread trading in the UK) is one product that a trader can use to enter the market to trade without buying the underlying shares. You can also use other products to trade like contracts for difference, futures, options or even buy the shares themselves as in traditional share trading.
So spread betting is a method of speculating on the price movements of an instrument without actually owning any shares or derivatives. A financial spread bet allows a trader to bet on whether they believe that the price quoted for a particular financial instrument, such as shares or the FTSE 100 index, is likely to strengthen (go up in value) or to weaken (go down in value). So in a nutshell it is a way to bet on whether an instrument will go up or down.
This could be an index (for example the FTSE 100), a share (for example Tesco), a commodity (for example gold or oil) or even a currency (say USD/JPY). When spread betting you do not own the underlying instrument, you are betting on which direction you think the price will move in. Instead of buying shares or contracts, you would be betting in £'s per point movement in the price (a point may be 1p, 1c, 100th c or a $ depending on the instrument you are trading).
The principle is quite easy to understand; essentially you stake a certain amount per point movement of a given instrument - such as a share or an index. The profit or loss for a spread better is determined by the difference in the buy and sell prices. When you bet that the price will rise, it is called going LONG and when you bet the price will fall you are going SHORT.
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It is easiest to explain spread betting using an example:
The FTSE 100 is trading at 4522-4524. This means that you can 'buy' (bet on the FTSE going up) at 4524. Or you can 'sell' (bet on the FTSE going down) at 4522. This quote has a spread of 2 points because the difference between the bid (the price at which you can sell) and the offer (the price at which you can buy) is 2 points.
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If the FTSE rises by 40 points: |
If the FTSE falls by 40 points: |
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Opening price |
4524 |
Opening price |
4522 |
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Closing price |
4564 |
Closing price |
4482 |
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No. points profit |
40 |
No. points loss |
40 |
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Stake per point |
£5 |
Stake per point |
£5 |
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Profit (40 x £5) |
£200 |
Loss (40 x £5) |
£200 |
This difference between the buy and sell price, referred to as a spread is how the spread betting firm makes a profit. So for instance, if the current value of the FTSE IS 4524 then a spread betting firm might quote a spread of 4523/4525. Were you to then buy £1 per point at 4525 you would instantly register a running loss of £2 as 4523 would be the price that you could sell back at. From then on, for every 1 point change in the quotation, your profit or loss would fluctuate by £1. Different spread betting firms offer different spreads on each product.
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Want a fully functional demo account to continue practicing? If so, feel free to create a simulator account at Capital Spreads |
Test your Knowledge with our Interactive Spread Betting Simulator - Input a Stake Amount in the 'Box', click on 'Trade', choose whether to BUY (GO LONG) or SELL (GO SHORT) and move the slider to see how much money you stand to make (or lose!) per point movement.
Remember that you can buy (go long) if you expect prices to rise or sell (go short) if you think prices will go down and that the more right you are the more you win. This is just one of the factors that makes spread betting very attractive. Spread betting is becoming very popular in the UK as people can start with a small account which can be as little as £500 and it is great for traders who want to get in and out of a trade quickly as the costs per transaction are low compared to traditional share dealing.
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Hope that answers some of your questions but feel free to send me queries, comments or concerns at traderATfinancial-spread-betting.com :-)
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