Spread Betting Guide

Financial Spread Betting carries a high level of risk, therefore you should only speculate with money you can afford to lose. In particular you will find that Financial Spread Betting prices can are often very volatile, allowing you great gains but similarly very large losses. It is not for the faint hearted and before you start you need to make sure you understand how it works. If possible first open a practice non-cash account with someone like IG Index.

The spread-betting guide

Understanding the risks is extremely important, but Spread Betting is based on a simple idea. If you think that a financial market, product, commodity etc will rise in value, they you would want to buy it (go long). If you think that that same financial market or product will fall in value, then you may want to sell it (ie go short on it ).

Buying a rising financial market or product (going LONG)

Once you have bought a financial market or product that you believe will rise in value, and if over the coming days or weeks your prediction is correct, you can sell the market or product for a profit. (If you are incorrect and the value falls, you will instead make a loss.)

Selling a falling financial market or product (going SHORT)

Once you have sold a financial market or product that you believe will fall in value, and if over the coming days or weeks your prediction is correct, you can buy the market or product back at a lower price, for a profit. (If you are incorrect and the value rises, you make a loss.)

What is a spread?

The spreadin this spread betting guide is the difference between the buying and selling price of a financial market or product. It represents the spreadbetting company's profit or loss on a transaction. The spreads are typically very low compared to traditional stock purchase. However to make the most money from spread betting you need to open an account with a company that has a low spread. See the advice on the spread betting companies page for more details of spreads at each company.

Example

Wall Street had a price of 9781 - 9790 points (financial markets quote values in either points or currencies). That means that you could purchase for 9790 points and sell for 9781 points.

How do I trade?

If you think that Wall Street will rise in value, then you request a price via the Internet. The trader will give you the spread, e.g. 9781 - 9790 points, then you purchase at 9790 for an amount (say £2) per point movement*. If the price moves up to 9870 - 9879 and you then sell at 9870, you would realise a point profit of: 9870 (price you sell for) - 9790 (price you bought for) = 80 points. As you have placed a trade of £2 per point, you would make a profit of £160.

Trading Examples

We strongly recommend that you place a stop loss order when you open a new Spread Bet to help protect you against large adverse price movements. A "guaranteed" stop loss will ensure that this price is guaranteed even if the price moves through the stop loss price - there is a small charge for guaranteed stop losses.

Individual share futures example

An individual share represents a unit of equity in a company. Many companies around the world have chosen to allow their shares to be traded on stock exchanges. This enables anyone to own a part of a company by holding one or more shares.

In this spread betting guide we will call you Arthur Dent, with the following account details:

It is 17th October and Shell's current share price is 419 - 420. You call the Spread Betting trading desk (or log on to the site) and ask for our price on December Shell (ie our current prediction of where Shell shares will be trading on the expiry date in December).

The spread betting guide quote on December Shell is 420.7 - 424.7.

The quote is calculated as follows:

Since we are providing a price for Shell shares in the future, we need to include a cost of carry (the cost of holding the position for a set period, ie three months or six months). Therefore, our quote is calculated using three factors:

• The cost of carrying the shares forward from now until expiry.
• The spread in the actual market.
• Our spread.

The cost of carry calculation for a December contract in Shell shares (currently 419 - 420) with 62 days left to expiry and an interest rate of 4.5% is:

419.5p x 4.5% x 62 days left to expiry/365 days of the year = 3.2p = cost of carry.

419.5p + 3.2p = 422.7p. Our spread on a share of about 400p is 4p, so our quote is 420.7 - 424.7.

What you do next

You expect the share price to rise before the bet expires in December, so you buy December Shell at 426 (the higher end of the spread betting guide price). You do this for £10 per point (or penny), which is a bet equivalent to buying 1,000 shares.

To place a bet, you must have sufficient funds on account to cover the initial margin (deposit). Shell has an initial margin rate of 10% of the total monetary value of the bet, so the initial margin is calculated as follows: opening level of bet, multiplied by the stake, multiplied by 10%. So, in this example: 424.7 x £10 x 10% = £424.7. All or part of the margin requirement is removed from your account when the position is full or part closed respectively.

Account status after opening the position:

Three weeks later, stocks have rallied and Shell is trading higher; your judgement was correct. The current share price is 454 - 455 and December Shell is 455 - 459. You decide to close your bet and take your profit. As you originally bought to open your bet at the higher end of our spread, you now close the bet by selling at the lower end, ie you close your bet at 455.

Your profit is calculated as follows:

455 (closing price) - 424.7 (opening price) = 30.3 points

30.3 x £10 (stake) = £303 (PROFIT)

Currencies example

Almost everybody has an interest in how foreign currencies are moving at some time, usually when calculating how much their money is worth on holiday abroad. Currency prices can fluctuate for many reasons, including changes in one country's interest rate relative to another, central bank intervention and speculative trading.

We will call you Arthur Dent, with the following account details:

You call the Spread Betting trading desk (or log on to the site) and ask for a quote on the price of September British pound against US dollar (the expiry date being on the second Wednesday in September). The actual September sterling/dollar future in the market is trading at 1.6653 - 1.6655.

We quote a spread of 1.6650 - 1.6658 US dollars to the British pound.

This means that £1 is worth between 1.6650 and 1.6658 US dollars.

What you do next:

You expect the pound to weaken against the dollar, so you sell at the lower figure of 1.6650 for your chosen stake of £5 per tick (on this market 1 tick = 0.0001).

To place a bet, you must have sufficient funds on account to cover the initial margin (deposit). In this case, the initial margin is charged at a fixed rate multiplied by the stake, ie 200 x £5 = £1,000. All or part of the margin requirement is removed from your account when the position is full or part closed respectively.

Account status after opening the position:

You call our trading desk on 7th September and are given a quote of 1.6512 - 1.6520 US dollars to the British pound.

Result:

With all markets you can trade out of the position before the expiry date by trading the same stake in the opposite direction. In this case, as you originally sold £5 per point to open the bet, you would buy £5 per point to close the position.

1.6650 (selling price) - 1.6520 (purchaseing price) = 130 ticks

130 x £5 (stake) = £650 (PROFIT)

PLEASE NOTE - the spread betting guide example above shows a profit but you would make losses if the price moved in the opposite direction.

Get Started!

If you would now like to get started have a look at some of the reviews on the spread betting companies page