Differences between Spread Betting and Ordinary Betting

There is a fundamental difference between spread betting and ordinary betting, and this can best be shown by using horse or dog racing as an example.

When you decide to bet on a horse or a dog before a race takes place, you select the animal that you think will win (or which might finish in the first three past the winning post). Then you shop round for the bookmaker who is offering the best odds against the animal of your choice. Incidentally, it is amazing how punters very rarely challenge a bookmaker on a race course to improve his offer, and if you do so, how very often it is possible to get better odds, particularly at point-to-point races.

When you have placed your bet, there is nothing that you can do about it until the race is run. You cannot cancel it during the race, or two minutes after you have placed it. You cannot claim any of the profit during the course of the race if your selection is leading the field at that time. If your selection (backed to win) fails to be first past the post, you have lost you entire stake. (The same applies if you had backed the animal for a place and it fails to make the grade). You have bet that at a certain time in the future (the end of the race) your selection will have achieved a certain position vis-à-vis the other runners, and you have to wait until the event has taken place, and the time has passed however long it takes, before you know whether you have made a profit or a loss. From the moment that you make the contract with the bookmaker you have lost control of that money. If the animal does win, then you know exactly how much money you will win, irrespective of what happens to the price after you have struck your bet with the bookmaker.

Financial spread betting differs from conventional betting in that there is no 'winning post', although there is a period of time involved. You select a share, index or commodity whose price you think will go either up or down over a period in the future and you approach a financial spread betting bookmaker to ask him for a 'price'. He will quote you a figure that he believes your selection will have achieved at the end of a specific time, and you decide whether you think he is right or wrong. If you think he is wrong, you place a bet with him that is based on a stake per unit (per penny in a share price or per point in an index) in the direction that you think the figure will be i.e. higher or lower than his quote. It is not important whether your selection achieves exactly any specific price on a specific date in the future, merely that the unit price exceeds or falls below the price quoted by the bookmaker at the time you made a contract, and whether it does or not, you can close the bet at any time whether you are making a profit or loss, before the specified period has elapsed, at which time the bet will be closed out whether you are in profit or loss.

Spread betting, therefore, is far more flexible than conventional betting, and you are in control of your financial affairs at all times. You can take a profit whenever one occurs, if you want so to do, or you can cut a loss at any time if you believe that your original prognosis was wrong.

The amount of money that you can make from financial spread betting can be considerable without the need to pay up money for a stake at fixed odds. The result of this is that the 'gearing' that can be working for you can produce spectacular wins of large amounts of money for no initial outlay. Remember that also that large losses can occur if you do not impose guaranteed stop-loss limits when you place the bet initially. Stop-loss limits can be altered, up or down, during the period that the bet is open, which can allow you to lock in some profit, or reduce further any potential loss.

The Technicalities of Spread Betting

When you want to place a spread bet on a share or index or commodity, you are quoted two prices - one at which you can buy (the offer price), and one at which you can sell (the bid price). The difference between these two numbers is called 'the spread'.

If you think that the price will go up, you place a 'buy' bet. If you think that the price will fall, you place a 'sell' bet. You are betting on the movement of the price, and you start by deciding the amount of your stake you will risk per penny movement of the price.

When you telephone a financial bookmaker to ask the price of a share in order to place a spread bet, he will quote you two prices - one at which you can buy (offer price) and one at which you can sell (bid price). They will always quote bid first and offer second. The difference between these two is called the spread. It is most important that you realise that whilst you may see a price on a screen for any given share, that is the 'cash' price in the market at which you can deal at that moment. The price that the bookmaker will quote you for the same share is the 'futures' price which will probably be quite a lot different from the cash price. You will be betting on the futures price, and you must choose whether it is the 'near' future, or the 'far' future that you want to use. The year is divided into four quarter days, 31 March, 30 June, 30 September, and 31 December. The near future date is the one closest to the current date; the far future date is the next one after that.

Whilst the futures prices bear some relationship to the current cash prices of most ordinary shares, there is often a delay before they may react to current news. They are reflecting what the market thinks the price of the share will be on that date in the future. You are betting whether, in your opinion, they are right or wrong, and which way (up or down) and by how much.

Don't forget that you 'open' a bet by buying at the offer price, or selling at the bid price. You 'close' the bet by dealing at the opposite price description e.g. if you open with the offer price, you close with the bid price, and vice versa.