These days, I'm regularly receiving questons regarding spread betting from some of you. Since I thought some of them might be of interest to our visitors I'm publishing the answers here:
Q: What is Spread Betting?
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).
So What Is Spread Betting?
It's a tax-free*, commission-free alternative to trading stocks and markets.
* Tax laws can change from time to time and may differ if you live outside of the UK and Ireland.
So What Is Spread Betting?
Mostly it’s like buying and selling shares:
You can profit from a change in the price of shares or ther financial instruments, such as commodoties or currencies.
How much you win or lose depends on how much the price goes up or down.
It’s also a bit like betting on sports:
In football you can bet on a team winning or losing. In spread betting, unlike regular investing, you can bet on a share price to go up or down.
So What Is Spread Betting?
You are placing a bet rather than buying a share, which means:
It is treated like a bet by the UK and Irish tax authorities so it is tax free!*
There is no stockbroker and no stock broking commissions or account fees.
*Tax laws can change from time to time and may differ if you live outside of the UK or Ireland.
What can you trade?
Spread betting lets you trade a wide variety of financial instruments:
Indices like the UK 100 and Dow Jones 30
Stocks and shares like Vodafone or Ryanair
Commodities like Gold and Oil
Currencies
How Much Does It Cost?
A spread bet always has two prices - the ASK price (that you can buy at) and the BID price (that you can sell at). The difference between the two prices is called the spread.
In the example below the spread is 6.03 - 6.00 = 3 cents.
With spread betting there is no commission and no account charges
- the only "fee" you pay is the spread.
How much money you make depends on what happens to the price.
A Simple Example
The price for Ryanair is currently €6.00 - €6.03
You decide Ryanair is likely to rise, so you buy at 6.03 for €5 a point
As it happens Ryanair goes up. You decide Ryanair is not likely to rise any more when it reaches €6.50 - €6.53
You close your bet by selling at €6.50
This means that for every cent the share rises above €6.03 you win €5. However for every cent the share falls below €6.03 you lose €5
The profit from your bet is:
Less the price you bought at
€6.50
Your stake
-
€6.03
The price you sold at
x €5
€235
The Benefits Of Spread Betting
Spread bets are often cheaper than buying ordinary shares and help you to avoid tax. However they are more suitable for short-term trading than long-term investing.
Spread bets let you trade a wide variety of instruments including shares, indices, currencies, oil and gold, in the currency of your choice.
Spread bets let you make profit when markets are falling as well as when they are rising.
You can learn to spread bet using a Capital Spreads demo account before risking any of your own money.
Spread betting carries a high level of risk and you can lose more than your intial deposit and stake. You should only speculate with money you can afford to lose.
Tutorial 1: Getting Started | So What Is Spread Betting
Spread Betting Introduction
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. Spread betting is, essentially, also a way of making leveraged bets on market prices in that the speculator stakes a relatively small amount of cash upfront on a trade, in the hope of making a significant gain.
⇑ ⇑ ⇑ ⇑ Listen to Money Talk from the The Motley Fool: David Kuo talks to David Jones, Chief Market Strategist at IG Index about the workings of spread betting.
Demonstrating how Spread Betting Works
If you believe an asset is going to fall in value you place a 'sell bet'. If you believe the asset is going to rise in value you place a 'buy bet'. The movement of the underlying asset is measured in points. For shares trading a one pence change is equivalent to a 1 point change. However, for indices a one pound change is equivalent to a 1 point change.
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.
If the FTSE rises
by 40 points:
If the FTSE falls
by 40 points:
Opening price
4524
Opening price
4522
Closing price
4564
Closing price
4482
No. points profit
40
No. points loss
40
Stake per point
£5
Stake per point
£5
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. Then, were you to buy the FTSE £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.
Want a fully functional demo account to continue practicing? If so, feel free to create a simulator account at Ayondo
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.
