July 23, 2014

Spread Betting Explained

Spread betting allows you to trade on the price movements of a variety of instruments, including financial markets, commodities and companies. The ability to trade based on price movements means it is possible to make money whether the market rises or falls, so long as your bet speculated the correct direction of movement. The terms ‘go long’ and ‘go short’ are commonly used to indicate whether you feel a market is to increase or decrease in value respectively.

Bets are placed on a ‘per point movement’ basis, rather than trading a specific number of shares. With spread betting, you do not have physical ownership over the instrument you are betting on. Rather you place a bet based on leverage. This means that you are using borrowed capital for your bet in the hope that the profits made will be greater than the interest payable.

However, spread betting carries a high risk. Although the potential loss of spread betting can be limited by what is known as ‘stop losses’, these allow you to define a loss level where the bet should be terminated.

Here is a very simple example of spread betting:

  1. Shares in Company X are currently trading at 140-140.5.
  2. You believe that shares in Company X are going to rise, and place a bet at £140.5 for £10 a point (going ‘long’).
  3. The shares of Company X have risen 145-145.5. Your ‘go long’ prediction was correct, and you sell the bet at 145. This means you have made a profit of £45 (4.5 points x £10).

Conversely, if the share price of Company X dropped, you would lose money.