Spread Betting Examples

Q: How much capital do I need to start trading?

A: In theory, £1. There is not really a fixed amount; you can open a spread betting account for as little as £100 if you wanted to! However you MIGHT want to 'deal'??? If you really want to trade, you need to deposit 'margin' funds. Typically, if you expect to be placing £1's (per point) deals you need to deposit about £500. To make any 'real' money you should hold at least £5,000 in your margin account (and NEVER bet beyond half your margin...and (ideally) make sure you have a 'stop loss'...prices can change very fast and they WILL close your bet (and wipe you out) if the market 'spikes' against you, even for only a few minutes).

So in practice you really need to deposit a few thousands as otherwise you won't really have any margin for error and won't be able to diversify your exposure across different industries/asset classes [three of the top mistakes new traders tend to make are undercapitalization, unrealistic expectations and lack of diversification (putting everything in one stock or asset class)].

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Gearing and Leverage

Spread bets are ‘geared’ or ‘levered’
This means they give you the opportunity to make a big profit from a small outlay.

Let’s take a look at an example.

Gearing and Leverage

Ryanair is trading around the €6.00 level. You can:

a) buy 500 shares from a stockbroker at €6.00
 Money required in stock broking account = 500 * €6.00 = €3,000
b) buy a spread bet at €5 a cent at €6.00
 Money required in spread betting account = €150
  • Both positions will have the same result:
    If the price goes up and you sell at €7.00 each position gives a profit of €500
  • However the spread bet requires a much smaller outlay (€150 vs €3,000).
  • This effect is known as ‘gearing’ or ‘leverage’
As Spread Bets are geared they give you the opportunity to make a big profit from a small outlay.
However this means losses can quickly mount up too so it is important that you understand how
spread betting works and how to manage your risks.

Opening A Position ...

When we buy a new bet we ‘open a position’.
When that bet is then sold we ‘close the position’.

Ryanair is trading at around €6.00 and we are thinking about buying a bet at €5 per cent.

Before opening a position we need to consider:

  • The duration of the bet
  • How much money is needed to buy the bet
  • Where to put our stop loss order
Let’s have a look at each of these in turn before we work through an example

Duration Of A Bet

There are several types of bet available: Daily, Rolling Daily, Monthly and Quarterly bets

  • Each bet has a different market expiry date.
  • Expiry refers to the ‘length’ or duration of a bet.

Traders often close their bet before its market expiry date. If a bet does reach its market expiry date it will automatically be closed. You then take the profit or loss from that closing price.

  • Daily bets expires at the end of the day on which they are opened - unless you close it first.
  • Rolling daily bets never expire; as long as you have sufficient funds in your account they will remain open. However you pay a small fee each night the bet remains open.
  • Monthly and quarterly bets allow you to hold a position for several weeks or months.
    - Monthly bets expire around the middle of the month.
    - Quarterly bets often expire in March, June, September and December.

Duration Of A Bet

  • Rolling daily bets never expire; as long as you have sufficient funds in your account they will remain open.

  • However you pay a small fee, called a rollover charge, each night the bet remains open:

    • - Spread bets are ‘geared’: you only put down a small amount of money, but you get the benefit of a much larger investment
    • - In effect you are borrowing the money to make up the balance of the investment.
    • - The rollover charge is the interest you are paying on the borrowed money to keep the position open an extra day.

Duration Of A Bet

Don’t forget that you can close your bet at any time before the bet expires during InterTrader market hours. Market hours vary from one instrument to another but for shares they would be similar to the exchange’s opening hours.

For our example let’s say we decide to buy the June Ryanair bet.

Initial Margin

  • When buying shares we need to pay the full purchase price of those shares.
  • However with spread betting we only need a fraction of the value of the shares available in our account. This amount is called the Initial Margin.
  • Each bet has a value, called an ‘Initial Margin Requirement’ or IMR. To calculate our Initial Margin we simply multiply our stake by the IMR.

Initial Margin

  • We want to buy the Ryanair June bet at €5 per cent
  • The IMR is 30
  • The formula:
    Bet stake x IMR = Initial Margin
  • We need an Initial Margin of
    €5 * 30 = €150
    in our account to buy this bet

Making More Bets

When we place a bet a certain amount of money becomes ‘tied up’. That money will be used to cover the potential losses our bet might incur - so it cannot be used for trading until that bet is closed.

The funds in our account, less the money ‘tied up’ by our bet, is called our Trading Resources.

We can make more bets. However the Inital Margin of each new bet must be less than our Trading Resources.

Stop Loss Orders

An order is simply an instruction you send to InterTrader to buy or sell a bet.

There are several order types, which we’ll discuss in the next tutorial.
However stop loss orders are really important so we’ll discuss them here.

Stop Loss Orders

  • An order is simply an instruction you send to InterTrader to buy or sell a bet if certain conditions are met.
  • A Stop Loss Order is a particular type of order that closes your trade if your losses reach a specific level.
  • Stop Loss Orders are important because they act as a safety net and can prevent you from making big losses.
  • Every time you place a new bet InterTrader will automatically place a stop loss on for you.
  • However you can change the level of this stop loss as often you like.
  • At InterTrader we always do our best to execute your stop loss orders at the price you want - but as markets can gap stop loss orders are not guaranteed. Click here for more information.

An Example Trade...

Previously we said that Ryanair is trading at around €6.00 and we are thinking about buying a bet at €5 per cent

Before opening a position we need to consider:

  • The duration of the bet
  • How much money is needed to buy the bet
  • How to use stop loss orders

To Sum Up

  • Spread bets are available in various durations: Daily, Rolling Daily, Monthly and Quarterly.
  • Spread Bets are ‘geared’: they give you the opportunity to make a big profit (or a big loss) for a relatively small outlay.
  • As spread bets are geared, losses can mount up. So it is important to use stop losses to manage your risk.
  • We always do our best to execute your stop loss orders at the price you want - but as markets can gap stop loss orders are not guaranteed.
Tutorial 2: How To Trade | Welcome to Tutorial Two

How to Trade. Try spread betting at InterTrader

Q: What markets are available?

A: When people talk about the stock market and financial trading, one of the first things that comes to mind is trading stocks and shares. However, spread betting is not just about shares. A vast range of markets can be accessed from a single spread betting account; most global stock indices can be traded while forex markets have always provided plenty of volatility across all timeframes and of course recently, commodities such as oil and gold have also caught the interest of many traders and investors. Broadly speaking, if there is a financial market that trades and is reasonably liquid in terms of daily volumes, chances are that you can probably trade it via a spread bet. In fact, the range of instruments you can trade is huge. Most spread betting providers will offer at least the following markets:

  • UK, US and European shares (allowing you to deal in thousands of international companies)
  • Forex Pairs including Sterling, US Dollar, Yen and Euro
  • Indices - e.g. FTSE, Dow Jones, CAC, DAX, NASDAQ, NIKKEI..etc
  • Sectors - such as Banking, Retailers and Mining
  • Metals - including Gold, Silver, Platinum and Copper
  • Commodities - for example Oil, Corn, Cocoa, Coffee, Soybeans, Sugar and Wheat
  • Bonds and Interest Rates - like the UK Gilt and Euro Bond
  • Volatility and Inflation Futures

This means that you trade on the price movements of individual equity shares, like British Airways or the Royal Bank of Scotland, without the costs and restrictions usually associated with purchasing those shares. You can also speculate on the price movements of a market segment like the FTSE 100 or Nikkei or EU Stocks 50, and trade the price of a group of companies in one market. You can also spreadbet on commodities like oil, agricultural produce and metals like gold, silver and platinum. You can even trade one currency against another; for instance bet on the rates for euro/US dollar, sterling/US dollar and sterling/euro. Think a currency pair is going to rise or fall but not sure by how much? Speculate on the direction of pairs, like the EUR/USD, USD/JPY and GBP/USD, without the need to identify a specific price.

Usually, it is only possible to spreadbet on individual shares when the underlying stock exchange on which the stock is quoted is open for trading. The other markets (indices, commodities...etc) derive their value from future contracts which means that you may be able to trade them even after-hours which means that you can trade some stock indices when the underlying market is closed. Ultimately, all an active trader wants are markets that move.

While there is a huge choice of markets, you are advised to stick to companies, indices or currencies that you know and watch carefully.

Q: What types of bets are available?

A: Most choose to use spreadbets for positions lasting a few hours or days but they can very well be employed for longer-term strategies over a few weeks or months. In fact there are different kind of spread bets available including daily, weekly, monthly and quarterly bets. Daily bets are intraday bets that expire on the same trading day as the position is opened. You can choose to roll over a daily bet to the next day for a small fee (referred to as financing). What happens here is that the opening level of the new bet is adjusted to reflect the effect of interest and any dividends, but there will be no extra spread to pay. Rolling cash bets are a type of daily bet where the rollover takes place automatically each night until the bet is closed and are very popular with traders. To maintain long term positions, it is usually best to use the 'futures-style' bets that run for up to three months at a time and which you can simply 'roll' to the next quarter.

P.S. Note that not all providers may offer the weekly, monthly or quarterly bets however almost all will offer the daily rolling bet. Do understand when one bet is more attractive to use than the other.

Q: How does an index bet work?

A: You can bet on the direction of the wider market by betting on an index that represents a group of shares. I'll run through a couple of examples which will hopefully make things clearer. Take the FTSE 100 -:

⇑ ⇑ ⇑ ⇑ Listen to our Introduction of Financial Spread Betting.

Spread Betting Workings

The explanation text that follows is intended to help highlight the points raised in the podcast above.

The FTSE 100 Index is presently being quoted: 5775 - 5776.
If you think the index is going to rise, you buy, if you think it is going to fall you sell.

Profitable Trade

If you think the index is going to rise, you would buy at the high end of the bid-offer spread - in this case 5776.
You buy at £1 a point at 5776.
At some point later on in the trading session the index price has gone up 10pts: 5785 - 5786.
You want to close the bet so you sell £1 at 5785 (lowest quoted price).
5785 - 5776 = 9pts.
Profit = £1 (Stake) x 9pts = £9

Losing Trade

Bought at 5776.
Later on in the trading day, the FTSE has fallen by 10pts and you believe the fall will continue so you want to cut your losses short.
The spread is now: 5765 - 5766.
In this case you can sell at 5765.
5776 - 5765.
Loss = £1 (Stake) x 11pts = £11

Forex Example

EUR/USD: 1.4039 - 1.4040.
If you treat it as 14039 - 14040 it makes it easier to understand (1pts spread)

EUR/JPY 80.47 - 80.49.
8047 - 8049 is equivalent to a spread of 2pts.

Example 1: Graphical Illustration

Index Spread Betting Example
Try Spread Betting at InterTrader

Example 2: Let's assume the FTSE is presently at 5350.

FTSE 100 actual market price = 5350
Spreadbet quote is 5349/5351

The first number constitutes the sell price while the second is the buy price, so say for example if you believe that the market will go up, you would buy at 5351, for say £1/point; which means that you're £2 down from the outset as the sell price is 2 points lower, but obviously you expect that the market will rise and thus be able to sell at a much higher price as the spreadbet quote mirrors the market.

The movement of the underlying asset is measured in points so for instance; for shares 1 point = 1 pence while for indices usually 1 point = £1 and you can place a spreadbet of any value against every point movement in the underlying i.e. £1 per point, £10 per point or £15 per point...etc. To close a spreadbet you simply place an opposite bet on the specific asset at the same £ per point. To close a buy bet you sell at the current quote and to close a sell bet you buy at the current quote.

As for financing with the above example, what you've essentially done, when opening a buy position at £1/point is roughly equivalent to investing £5351 of FTSE 100, now to open that spread bet the provider will require a margin (a percentage of the money invested in the market) - the percentage required differs from provider to provider. Let's suppose that to open an up bet for £1/point will require £150 margin, now if you keep that bet open overnight, the money outstanding i.e money invested minus the margin, will need to be financed, this is calculated using the LIBOR rate with a bit added on top for the broker, with the current LIBOR rate it would work out to be about 60p per night.

Note: The example above serves as a simple explanation and make use of round prices. What is happening in actual fact is that if trading on the FTSE the spread might be 4523-4525 if the current index value is 4523.9 - 4524.1. If you buy FTSE at 4525, with a £1 stake, then you will be immediately £2 in loss (due to the 2 point spread) and will gain £1 for every point increase in the FTSE, and lose £1 for every point decrease in the FTSE.

In practice there is never any single price in the market for any instrument so it's too simplistic to say the FTSE is at 4523 for instance... there's always a price to buy and a price to sell. So the FTSE may trade at 4523.9 - 4524.1 and on the spread betting provider's platform this would be quoted to say 4523 - 4525.

Q: Show me a share example...

A: Suppose Tesco (the supermarket chain) share price opened the day at 360.50p and you thought that Tesco shares are worth buying in the short term. With shares, spread betting providers usually take the price from the underlying exchange and add a little bit extra to the bid-offer spread; which represents the full round-trip cost of a trade (since there is no extra commission or stamp duty to pay).

Checking the daily rolling quote for Tesco you see the bid-offer spread being quoted at 354.1-355.1 and decide to buy (i.e. go long) at £100 per point movement at 355.1p. Each point is the equivalent of a one pence move in the share price (i.e one point = a 1p movement in the share price), so a bet of £100 a point is the equivalent of buying of buying 10,000 shares (to get an idea of your total exposure for UK shares always add two zeros to the amount you have bet per point).

Let's say Tesco ends the day up at 363.50.

Bought £100 a point Tesco at 355.1p.

Sold £100 a point Tesco for an £840 profit (363.50-355.1 = 8.4 x100 = 840).

* However if Tesco ended the day down at 350 you would lose £240 (350-355.1 = -5.1 x 100 = -510).

To highlight the access provided by spread betting, referring to the above Tesco example again, betting £100 per penny movement would be the monetary equivalent of buying 10,000 shares as each penny movement in the share price can win or lose you £100.

Compare this to a stockbroker where you would need to put down £35,510 to buy the stock, this contrasts sharply to a spread bet where you only have to make an initial deposit (also known as the Notional Trading Requirement).

Some spread betting providers offer up to 5% NTR on blue chips meaning that you would need £1,775.50 to enter this trade. Be warned, however, that if the market were to move against you, you would be required to make additional payments to maintain your position. Note that margins (i.e. NTR's) are higher for more volatile or illiquid stocks and vice-versa. For instance defensive retail stocks like Tesco are less likely to experience wild swings in their share price and might only move up or down 10p in a day while a company like Rio Tinto (which is a mining company and thus dependent on global commodity prices) might experience daily high-low range of well over 100 points.

Share spreadbets are only available when the underlying stock exchange is open, which means if you run a position overnight there is a possibility that the market may gap it opens the next day. Note also that the minimum bet on UK shares is normally a pound for each penny move, which could be compared to an investment in 100 shares.

Q: How about a forex example?

A: Typically, most of the major forex pairs like the euro/£ will have a tick size of 0.0001 so for instance euro/£ can be trading at 0.9500. Minimum bet is usually 50p or a pound per point and normally the spreads are about 2 ticks from the main spot rates and 10 on the corresponding forward rates. Margin requirements are usually 1% or 2% of the effective market exposure.

In the past I used to spread bet quite frequently on the exchange rate between the USD (Dollar) and the EUR (Euro). If the exchange rate is quoted as, say 1.4241 this means that $1 buys you $1.4241. Here you are basically betting on the last digit ticking up and down, so a £1 spreadbet actually means that for every 100th of a cent (point) the exchange rate moves you make (or lose) £1. It is worth noting that the forex market is huge and very volatile and these numbers can fluctuate by as much as 20 points in the space of 15 minutes, in some case by 100's.

Let's take an example involving the euro/£ cross-rate. For instance, with the euro/£ rate in February at 0.9500 you could have opened a short bet at £1 per point if you thought that the euro is going to weaken against the UK sterling. This would be equivalent to a market exposure of £9500 and based on a 2% margin requirement this would require a minimum deposit of £190. In mid-March the cross-rate was 0.8800 (meaning that 1 euro was worth 88p) and you could have closed your down bet for a gain of £700. (0.9500 - 0.8800 = 700 points x £1). On the other hand, in June the euro was trading at 0.8432 and by last October it had rallied to 0.9520. Had you bought this trade at £1 a point, your gains would have been £1088.

As you can see, once you have grasped what a one tick move represents on a particular currency pair, you simply have to decide the amount of pounds you wish to bet per tick and open a trade accordingly. All profits and losses will be computed in your account currency, normally sterling.

Q: Can you use a spreadbet to trade commodities?

A: Yes, of course; in fact spread betting providers regularly quote prices on a range of metals such as gold or silver as well as leading agricultural commodities such as corn, coffee, cocoa, coffee, oats and soya produce. You can either spread bet on the commodity market itself, or, in some instances, on the ETF (exchange traded product) tied to it.

Spread betting companies typically arrange their commodity markets into three categories, which are:

  • Energies such as Crude Oil and Natural Gas.
  • Metals such as Gold, Silver, Copper, Platinum and Palladium.
  • Soft Commodities such as Cotton, Wheat, Sugar and Orange Juice.

In fact there are certain advantages in using spread betting as opposed to futures to trade commodities as it removes the undesirable currency exposure. For instance gold is quoted in dollars and has been very popular recently as a hedge against inflation, but the currency presents a complication for traders whose local currency isn't USA dollars.

If you had bought gold on 5th September 2009 you would have had to pay some $960/oz. If you had held this position until the 19th September and sold at the highs of $1024/oz you would have made a gain of $64/oz. However, if you had made this transaction in sterling, you would have actually made less profits since as gold increased, so did sterling's value against the dollar.

To understand this consider that on the 5th September, £1 was worth $1.63 which means that gold was $599/oz. On the 19th September the UK pound was trading at $1.67 which implies that gold was only worth about $613/oz and you would have 'only' made a gain of $14/oz.

However, since spread bets are traded in pounds per point for each point the underlying market moves, regardless of the currency, you still make or loss a pound. So going long using a spread bet in our example you would have made stood to benefit from the full $64/oz. Having said that keep in mind that most commodities cost more to spread bet, than, say the main index markets. To trade corn for instance (which is probably one of the cheaper ones), the difference between bid and offer prices could amount to several times that on the FTSE 100 (for a market less mainstream like oats the spread could be even wider). However, the cost in absolute terms is still relatively small, fairly less than 1% of the price even for the more expensive contracts.

Note: If you're keen on commodities then your choice of spread betting company may be important, because some of the more esoteric commodities are only available to trade on certain platforms. For example: right now I could trade Lean Hogs and Live Cattle using IG Index but not using LCG; I could trade Platinum and Palladium using ETX Capital but not some other providers.

Q: So you could even bet on a sector?

A: Certainly. A sector is a group of shares in specific industry - they are very much like an index but are more targeted; say oil or financial companies. You can even place a pairs trade if you believe that one company is way undervalued/overvalued relative to the wider sector. For instance if you thought that Tesco has great potential and believed that its value is not reflected into its current stock price, you could go long on Tesco and short the food sector. In this way, should Tesco outperform its industry peers while the two positions are open, you would stand to make money. In this scenario, you would stand to make money even if Tesco's share price retreated - in other words as long as the food sector fell by more, you would still make money, the key here is that Tesco fares better than the wider sector. For more information on spread betting on sectors check this link.

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