SpreadBetting - How it works - Part 2

Spreadbetting is most easily explained through an example - the concept is the same whatever the market. Imagine that in early August you believed the FTSE 100 index's value of around 6230 was too high and that share prices would fall over the following month or so. Accordingly, to spreadbet City Index for a quote - it gave you a FTSE 100 price for the third week of September of 6165-6175. Based on that spread, you had two choices. You could have bet on the Footsie falling below this level, by selling the index. Or you could have bet it would be higher than this in September, by buying the index. Either way, you bet by staking a sum, say £10, per point. As you expected the Footsie to fall, you took the former option. Now imagine that on 17 September, the FTSE 100 actually closes at 6020, 145 points below the City Index spread. On this basis, your profit would be £1,450 - 145 times your £10 stake. In fact, you do not have to wait until 17 September to book your profits. Gamblers can close their bets as soon as they become profitable. If the index had stood at 6050, say, on 1 September, you could have closed out your bet by reversing it - buying points from CityIndex.

However, the downside of spreadbetting is that the potential for large gains is equalled by that for large losses. Imagine that you had bought, rather than sold, points from City Index in the example above. Your loss would have been a nasty £1,550 - £10 times the 155 points the Footsie finished below your opening spread. It is important to note that in spreadbetting gains and losses are geared. The more right you get a bet, the more you win. But the more wrong you are, the greater your losses.

Not surprisingly, spreadbetting companies are wary about bad debts. They will only extend credit to investors who can meet any losses. Expect calls for cash from your bookmaker if your bets move into the red. On the other hand, all the firms say that, unlike conventional bookmakers, they do not lose on winning bets, as they lay off risks in the underlying markets. Spreadbetting firms, therefore, do not mind successful gamblers.

A spread bet price always has two parts. The first is the BID or the price you can sell at. The second is the ASK or the price you can buy at.
The Ryanair price is €6.00 – €6.06.
This means you will gain €5 for every cent the price moves up and lose €5 for every cent the price moves down.
You think the Ryanair price will rise and buy at €6.06 for €5 per cent
If the price rises to €7.06 – €7.12
If the price falls to €5.06 – €5.12
You sell at €7.06
You sell at €5.06
Your profit is
(7.06 – 6.06) x 100 x €5 = €500
Your loss is
(6.06 – 5.06) x 100 x €5 = €500
Betting on the FTSE 100 index allows you to speculate on a stock market without needing to choose individual shares.
The FTSE 100 index bet is priced at
6500 – 6502.
This means you gain €4 for every point the price moves down and lose €4 for every point the price moves up.
You think the index will fall, so you sell at 6500 for €4 per point
If the price falls to 6398 – 6400
If the price rises to 6598 – 6600
You buy at 6400
You buy at 6600
Your profit is
(6500 – 6400) x €4 = €400
Your loss is
(6600 – 6500) x €4 = €400
A great way to trade oil is to spread bet on the price of Brent Crude
Brent Crude is priced at
$90.00 – $90.04.
The Brent Crude price is in US Dollars but with spread betting this is irrelevant. Your gains and losses are paid for in the same currency as your account.
You think the price of oil will fall, so you
sell at $90.00 for €1 per cent
If the price falls to $84.96 – $85.00
If the price rises to $94.96 – $95.00
You buy at $85.00
You buy at $95.00
Your profit is
(90.00 – 85.00) x 100 x €1 = €500
Your loss is
(95.00 – 90.00) x 100 x €1 = €500
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Financial Spreadbetting and bed and breakfasting

Until the 1998 Budget, investors with large share portfolios had been able to sell shares and buy them back the next day in order to raise the acquisition price of their holdings. This limited their liability to capital gains tax (CGT) in future years. But since April 1998, any share sold and repurchased within a 30-day period is deemed to have its original acquisition price for tax purposes.

Spreadbetting can get you round this problem. Imagine that you hold 5,000 shares in Manchester United, today worth around 215p a share. You paid 80p a share for this holding so you are sitting on a notional gain of £6,750, below the £9,600 CGT allowance for 2008-2009. Clearly, if the shares outperform, your gain could move above the CGT threshold. One solution is to sell your Man United shares for £10,750. At the same time, you ask a spreadbetting firm for a quote - let's say it offers you a spread of 210-220 for Man United shares in a month's time. You therefore buy the shares at £62.50 a point. Now, imagine that in 30 days' time, Man United shares are trading at 240p. You close your bet and bank £1,250 in profits. Add in the £10,750 proceeds from the sale of your shares and you have £12,000, enough to buy back your holding. You do so, raising your acquisition price to 240p a share, solving your CGT worries without falling foul of the Inland Revenue's rules. It does not matter whether you win or lose the bet. As long as you work out how much to bet per point, you will have the right amount of cash to buy back your holding. The bet gives you exposure to the share without you having to hold it.