Spread Betting Explained

The UK financial spread betting industry is one happy story of innovation and successful entrepreneurship, of a young(ish) industry built by smart people, making money and creating jobs out of an interesting idea. The City at its best. Well, at least officially…

Since 2009 the “Europe is doomed, hide, get away, oh god oh god” speech has been wheeled out by permanent bears worldwide, and the speech hasn’t changed much at all over those years. And while nobody will disagree that Europe looks economically challenged, the market has surged up, lurched down, up, down, up, down, and was just as true today as it was December-March, and just as true as it has been throughout the last few years. Can you make money purely having a static view like that and arbitrarily shorting at random intervals using that same static argument? If the market had done nothing but tank 2009-present then I could agree, but we need to time things accurately surely? The quotes are great, but they could have been from a 2010 article just as easily. This is where spread trading comines in.

Financial spreadbetting, whilst not new, has only in the last decade become widely available owing to both online accessibility and the new trend of investors wanting to take more control of their finances. This form of trading was once regarded as strictly something for City types, who fancied taking the same risks with their chunky bonuses that they took in their day jobs. In fact, in the past spreadbetting was mainly the preserve of City high fliers but in recent years it has grown to be one of most popular products used by retail investors across the UK to speculate on the financial markets. Today, one can say that spread betting is increasingly being used by normal people who want to take on highly speculative market views with a small part of their portfolio.

What is spread betting?

Spreadbetting involves placing a trade on whether a particular financial asset class will rise or fall in value and in relation to a quoted spread, which comprises bid and offer prices.

So what is a financial spread bet?

A financial spread bet is a way of trading on an asset, such as a share or a commodity or even an entire market, such as the FTSE 100 index, without having to physically own that asset.

You are simply placing a bet with other traders, that the price of an asset will go up or go down. Spread betting firms quote buying and selling prices in ‘points’ based on the actual price of an asset in the market, and u choose to bet on those prices. For every point that the price moves in your favour, you win multiple of your stake – and for every point it moves against – you lose a multiple of your stake.

If you think that an asset will rise in value then u ‘buy’ the spread bet known as ‘going long’, and aim to sell it at a higher price. If you think that an asset will fall in value, then you ‘sell’ it, known as ‘going short’, and aim to buy it back at a cheaper price. You can close a spread bet at any time, to realise a profit or loss, by taking an opposite bet of the same value.

So what can you bet on?

The range of markets you can trade via spread bets is vast – you could for instance deal in shares, oil, gold, politics and sport… Financial spread betting is the biggest part of the market in the United Kingdom and in fact one can take advantage in over 6000 individual shares – as well as a range of indices, forex pairs, commodities and more. Investors can for instance spreadbet on individual stocks, indices like the FTSE 100 or Dow Jones, commodities like gold and oil, forex pairs like the USD/EUR or GBP/EUR and interest rates.

Why spread bet?

While the losses can exceed the initial stake, so too can the gains, and profits aren’t taxable. You can bet on a huge range of markets from one account and with spread betting you can also profit when prices are falling.

• More opportunity – Go long and short. Open positions with a fraction of the capital you’d need in the underlying market.
• Complete control – Limit potential losses using a range of risk management tools.
• Flexibility and convenience – Open and close positions 24 hours a day. Automate your dealing with limits and stops.

How?

Let’s consider the FTSE 100 market. If you believe the Footsie will rise, you “buy” at say £1 a point. If you believe it will fall, you “sell”. If you sell at £1 a point and the Footsie drops 50 points, you make £50. But if it rises 50 points, you stand to lose £50.

Examples

Share Bet Example

Vodafone is quoted by a spread betting firm at 144-146. You think that the share price will rise and decide to place a buy bet at 146, betting £10 per point. As it is a UK share, you are only required to have 5 per cent of the value of the position in your account as margin: 5% x £10 x 146 = £73. At the end of the day, the price has risen to 150-152. So you close your position by selling at 150. You have made 4 points (150-146) x £10 = £40.

Commodity Bet Example

US crude oil is quoted by a spread betting firm at 120.50-120.56. You think the price will fall and decide to place a sell bet at 120.50, betting £1 per point. As it is a commodity, you are only required to have your stake multiplied by the notional trading requirement – in this case 140 – in your account as margin: 140 x £1 = £140. Soon, the price falls to 118.44-118.50. So you close your position by buying at 118.50. You have made 200 points (120.50-118.50) x £1 = £200.

Currency Bet Example

Sterling-dollar is quoted by a spread betting firm at 2.0010-2.0013. You think that the dollar must depreciate and place a buy bet at £2 per point. As it is a currency pair, you are only required to have your stake multiplied by the notional trading requirement – in this case 150 – in your account as margin: 150- x £2 = £300. Soon, the price rises to 2.0047-2.0050. So you close your position by selling at 2.0047. You have made 34 points (2.0047-2.0013) x £2 = £68.

Isn’t that a bit risky?

Well, yes it is risky. Let’s assume you place a £10 a point bet on the FTSE 100 index. A 100-point rise on the FTSE 100 will stand to make you £1000 (assuming a £10 per point stake), but a 100-point drop will lose you £1000. Although there are ways of mitigating the risk by using smaller stake sizes and utilising stop loss orders to limit the amount you can lose on any bet. It is also good practice to work out a worst-case situation. Let’s assume a share trading at 150p. If the stock is wiped out, the most stand to possibly lose is 150 multiplied by the size of the stake.

Spreadbets are ideal – the leverage, low dealing costs costs and no stamp duty mean it is much easier to get in and out of positions, permitting short-term, even intraday gains.

The new opportunities for former Forex markets users and online betting customers to come and bet on some Financial spreads, is a big change for them. Starting the financial spread betting with the knowledge from the old used programs is the big advantage for these betters, upon the new financial spread betting UK users.

The markets for the financial spread betting are various and you can bet on each of them without actually having any stocks or holdings. The idea in the financial spread betting is that you place the bet on the spread between the market value at the moment of the bet placing and the value of it in the future as for your prediction.

It’s true for the stocks market, the UK FTSE100, Oil, other commodities and any market you can think of. The betting’s goes for the spreads only and the benefit can be in one of two ways:

1. You can earn in the financial spread betting UK if a market moves up. Well, it makes sense, you place a bet on one market and its value is raising, you make the benefit from the market values jump and enjoy the earnings.

2. You earn even if the financial spread market is falling in value, only if you have placed a negative bet, predicting this market to lose value. It’s the first system to allow you make money from losing markets.

Out of these two options you are able to make revenue on the financial spread betting markets, from the UK and around the world.

Any account you are about to open, the best thing to remember is to start small and to grow with the financial spread betting company and the additional opportunities. The risk management is very important to save you from falling with the market; you must evaluate and know the best you are placing.