Financial Spread Betting Explained

Vince Stanzione explains what spread betting is in plain English.

Financial Spread betting also known as Financial Spread Trading is a way that traders can back shares, currencies, commodities, bonds and many other financial markets in many cases with relatively small stakes. Markets can be traded from one account both online, by phone and now on many mobile devices such as the Iphone.

In the UK it is tax free and offers the opportunity to make a profit whether the market goes up or down. It offers access to a wide range of markets from Indices (like the FTSE 100), 1000’s of individual shares, commodities and currency exchange rates.

A financial Bet: Unlike traditional share-dealing, you never own the actual share or commodity. You are simply making a bet on whether you think it will go up or down in value. You stake a certain amount of money per point movement – the more it moves in your favour the more money you make, the more it moves against your prediction, the more you lose. The good news is that your risk can be strictly limited using a guaranteed stop loss. So if you stake £1 a point with 100 point stop, your maximum risk is £100.

The Spread: The spread is the difference between the price you can buy at and the price you can sell at. You will buy at the higher price if you think the market will rise (Go Long or Up Bet), or sell at the lower price if you think the market will fall (Go Short or Down Bet). The tighter the spread, the smaller the market has to move for you to make a profit. No commission or funding costs are charged in spread betting the costs are all built in to the spread.

What can I Spread Bet on?

Individual Shares – Shares in individual companies from almost any market in the world including UK, US, Europe, Australia, Hong Kong and Singapore to name a few.

Stock market indices – Popular indices are the FTSE 100 and Dow Jones, but other indices such as the Nikkei 225, Eurostoxx 50, NASDAQ, S&P 500 or DAX can also be traded.

Commodities –  The last few years has seen a surge in trading on commodities such as  Crude Oil, Natural Gas, Gold, Silver, Copper, Palladium, Wheat, Cotton, Coffee Cattle, Soybeans and of course those famous Pork Bellies.

Currencies – Another hot area especially for shorter term traders is the Foreign Exchange market  (Forex or FX).  Popular currency pairs include EUR/USD, USD/JPY, GBP/USD, GBP/EUR, EUR/JPY and many more.

Interest rates and Bonds – Short term or long term interest rates, Government Bonds or gilts.

How does a Spread Bet work?

First, you select your market – Let’s take an individual share e.g. McDonalds.

Start by checking the price quoted by the spread betting company – it will reflect the actual share price.  There will always be two figures – the sell price and the buy price, the sell price will be lower. For example, it could be 7450-7460. The 10 points difference is the spread.

You must decide if you think the price of McDonalds shares will go up higher than the buy price, or fall lower than the sell price. If you think higher, you “buy” at the buy price, if you think lower you “sell” at the sell price.

Now, you must decide how much you are betting, that is, what your stake is – this is the amount of money you gain or lose per point of movement on the value of the share. It is always expressed in currency per point of movement e.g. £1 per point.

In spread betting you do not have to pay the full cost of what the share would be to buy – You will only have to pay a percentage – this is called trading on margin. But spread betting companies will require you to have a certain amount on deposit to cover potential losses (exactly how much varies from company to company and this figure is often called the Initial Margin Requirement).

You can close a trade at any time (as long as the underlying market is open) whether you are making a profit or a loss. You do not have to meet any specific value on any specific date.

A Spread Bet Example

So let’s consider our McDonalds example, it’s currently January and quotes are being made on June 2011 contracts – your spread betting company currently has a quote of 7450-7460. Two weeks later the share price increased in value to a quote of 7600-7610.

Example 1: Going Long

So you buy £5 a point of McDonalds at 7460 as you think the price will rise.

The price moves to 7600-7610.

You take your profit and sell at 7600.

Profit = (7600-7460) x 5.

Your profit is £700.

Example 2: Going Short

So you sell £5 a point of McDonalds at 7450 as you think the price will fall.

The price moves to 7480-7490 and you decide to get out

You cut your losses and buy at 7490

Loss = (7450-7490) x 5.

Your loss is £200.

In my course Making Money from Financial Trading I explain more and the exact system I use to buy and sell. For more details go to www.thefintrader.net

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