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So What is a Spread Bet?

In the stockmarket, when you want to deal in traditional shares, you go to a stockbroker and he will quote you two prices.

The lower of the two prices, which is the one you will get if you are selling shares, is called the bid price.

The higher quoted price is what you will have to pay if you are buying shares, and is the offer price. The difference between the two prices is called the 'Spread'.

In spread betting the principle is exactly the same, two quoted prices, bid and offer.

If you believe the share (or index, commodity or other market) will go up, you buy at the offer price - the higher of the two prices quoted.

If you believe the share is going to go down your bet will start at the bid price - the lower of the two figures.

To make profits you have got to cover the cost of the spread. When you have placed a buy bet you are not in profit until the sell price has risen higher than the price you bought at.

When you place your bet you will be asked to say how much you want to wager on a per-point or per penny. For example if you were betting on a UK share in say "£10" you stand to win, or lose, £10 for each penny the UK share price changes.

Top Tip for Beginners: £10 may not sound a lot but always remember you stand to make or lose this for every penny a stock may change. If a share suddenly soars or slumps on an announcement, you will soon be sitting on a large gain or a large loss. If you are new to this game, start small and build from there.

This bet stands until you choose to close it - by for example going back to your spread betting broker and taking the latest bid (selling) or offer (buying) price available. Another handy tip is that you can use a stop loss, where you don't have to watch the market every second, but can set-up a price at which you automatically close out the bet.

Still a bit confused? We realise that the concept may be a bit difficult to get your head around but a few simple examples will help.

The reality is that if you understand what you are doing, spread betting is no scarier than trading through a normal broker. And once you do 'get' spread betting you will wonder why you didn't think of using it sooner.

One of the major features of spread-betting is that any gains you make are currently free of capital gains tax.

Learn how to Spread Bet

What is Spread Betting?

FTSE Spread Bet Example

Christmas is approaching and you think the the FTSE 100 will increase in value due to successes in the retail sector. Buying the FTSE 100 (i.e. going long on the index) will allow you to profit if the rise occurs. So you decide to buy the FTSE 100 cash index (i.e. rolling daily) bet at 4525 and bet £5 a point. For every point the FTSE 100 goes up or down in value you will make or lose £5.

Test your Knowledge with our Interactive Spread Bet Demo - Input a Stake Amount in the 'Box', click on 'Trade', choose whether to BUY or SELL and move the slider to see how much money you stand to make (or lose) per point movement.

Want a fully functional demo account to continue practicing?
If so, create a simulator account at Bux Markets
Use it to further familiarise yourself with spread betting and to test your trading ability.
...so click here if you want to open your account.

Share Spread Betting Example -:

Scenario 1 for the Vodafone fan

You hear a whisper, read a news item, see a new phone model, whatever - something starts the old brain cells jingling and, after thoroughly researching the situation, you believe the Vodafone share price is currently under-valued. You believe the price is going to go up in the near future.

First you need to decide on your stake size. Let's assume for the purpose of this share spread betting example that you are still a beginner to this form of trading and that you wish to limit your leverage so you place a long (buy) bet at £10 per point at 137p. Note that spread betting quotes always include two prices - the bid (sell) which is quoted first and the ask (buy), which is quoted second - you always buy on the ask.

The spread price for Vodafone is currently quoted at 136 - 137 and you decide you want to wager £10 per point. Your bet starts at the 137 price.

Two weeks pass and the Vodafone spread price has risen to 156 - 157. Gadzooks! You were right, what a clever bunny you are. Also, as you are not a greedy bunny, you decide to close the bet. The payout is based on the 156 figure, which means you have a 19 point increase which, at £10 a point equates to £190 [profit = (closing price - opening price) x stake]. Not a bad profit for two weeks of holding...

BUT LET'S JUST SUPPOSE...

Scenario 2 for the Vodafone fan

Same situation. You fancy Vodafone and believe the 136 - 137 Spread undervalues the stock. You wager £10 a point and your bet starts at 137.

Oh dear! Fickle Mr. Market has confounded your confident prediction. The Vodafone price has dropped to 116 - 117, which triggers your 15 per cent stop loss. Your bet is automatically closed which means you have to sell at 116 so you have lost 21 points at £10 a point, a total of £210.

The only good news here is that you arranged an automatic stop loss, thereby limiting your potential losses (triggered stop losses mean you sell at the next best price).

How Spreadbetting Works - Some Simple Examples...For the Vodafone Sceptic:

Scenario 1 for the Vodafone sceptic

You've heard a whisper, read a news item, looked at the new phone model, whatever - and you just don't fancy Vodafone. You do more research, look at the up-coming competition and it confirms your gut feeling. You believe Vodafone, with a Spread of 136 - 137 is over-valued.

You place a bet on the Vodafone price going down, £10 a point, starting at 136.

Two weeks later it's bad news for Vodafone, good news for you. The price has dropped and the Spread is now 116 - 117. You close your position at 117, a profit for you of 19 points at £10 per point, £190.

But let's just suppose....

Scenario 2 for the Vodafone sceptic

Same situation. You have taken a long hard look at Vodafone and you are not impressed. With a spread of 136 - 137 you think the share is overvalued and will go down in the not-too-distant future.

You place your £10-a-point 'sell' bet and sit tight. The clock starts ticking at 136.

Calamity! Suddenly the market loves Vodafone and the price rises to 155 -156. Your 15 per cent Stop-Loss kicks in, and your bet is closed at 156. You owe the man £200.

(You will notice that in this scenario we added 19p, not 20p, to the spread price. That's because a 15 per cent Stop-Loss would have been triggered at 155 - 156).

P.S. For simplicity's sake in this example we have left out the technicalities of margin trading and financing..

Learn more about how to Spread Bet using our free trading course.

Spread betting is quite simply one of the most flexible and cost-efficient ways to trade the world's markets. As a good way for speculators to trade the markets, spread betting is simply hard to beat. It offers access to a huge range of financial assets around the world, all from a single account. With spread betting, you could trade Google shares, the Hang Seng, Gold, Crude Oil, German bond futures and the euro/yen rate on the same screen. And you could do so without having to risk more than a few hundred pounds...

Key Points on Spread Betting

Spread betting is not a way of trading shares. It is leveraged gambling on the price movement of shares. Say you bet 1 Pound a point on AIB, current price 1800, and it goes up to 1825. You close your bet and you win (1825-1800) * 1 = 25 Pounds. If you bet 10 Pounds a point and the share goes from 1800 to 1825 you win (1825-1800) * 10 = 250 Pounds. You don't pay the full cost of the share, just the IMR, say 60 Pounds, which is a deposit on making the bet. The downside to this is that you can lose more than you bet. For example, if you bet 10 Pounds a point on Elan at 2240 and the shares were to drop to 240 you lose (2240-240) * 10= 20,000 Pounds. You're not betting against the spreadbetting provider in the way you bet against a traditional bookmaker. Instead the spread betting company charges a 'spread' (i.e. a buy and sell price for each share) on each bet. The buy is always slightly more than and the sell always slightly less than the market price. This is how they make their profit and as they take money on both winning and losing bets you win at the expense of those who lose as it's a zero-sum game.

You buy at one end of the spread and sell at the other, and if the spread has moved far enough in the right direction between the time you buy and sell, you make money. If it moves in the wrong direction you lose.
The more right you are, the more money you make. The more wrong you are the more money you lose.
The size of your stake determines how much money you make per unit move.
You never actually own the shares, commodity, bond or whatever else it is that's the subject of the bet. Your bet is on the spread, not the underlying instrument.
With spread betting you can make money whichever way the market is moving - be it rising or falling.
To make profits you've got to cover the cost of the spread. When you've placed a buy bet you're not in profit until the sell price has risen higher than the price you bought at. When you placed a sell bet, you're not in profit until the buy price has dropped below the price you sold at. The wider the spread, the more difficult it is to make a profit.

When to Start Demo Trading

After you review this page, you might ask, so when do I start demo trading? Any time! Since you are just demo trading, you have nothing to lose. Just open an Bux Demo Account and get going. Do the paper trades, track them over time, plot your position over time, and you will start to see the oscillation of your position.

Continue using the dummy account/practice account until you achieve some fluency. It is not the same as real trading, not the same emotions potentially in play, but dummy accounts do allow you to practice the process of spread betting, including going through all the necessary steps of forming a trading plan, framing a trade for risk reward characteristics, placing the trade with the correct bet size, using appropriate order types, managing the trade until exit, and hopefully documenting the trade and learning lessons from it.

However as I've stressed above do keep in mind that a demo account cannot really simulate how you will act when a trade is open in a real account when real money is on the line and although theory is great, the best way to explore spread betting, and to bring trading to life, is to walk through some real trades.

The best, easiest and cheapest way to go short on stocks for the average investor is through spread betting. Sure, some brokers will let you shortsell, but usually you have to be either rich or work in the Financial Industry as there are regulatory constraints when offering these services. Basically if you work in the Financial Industry...etc you are deemed knowledgeable enough and if you are rich you should be knowledgeable enough .