Put simply spread betting is a tax free, commission free alternative to trading shares and financial markets. This means that you do not pay Capital Gains Tax, Stamp Duty or broker commission or account fees.
The main difference between trading the stock market and spread betting is that with spread betting you don't actually own the share, you are simply betting on the performance of the share. This also means that you can benefit when the share price falls not just when the price rises.
Spread betting is not restricted to just shares, but includes a wide variety of financial products including,
Indices
Stocks
Bonds
Currencies
Commodities
Interest Rates
In it's simplest form, if you think that a particular financial market will rise in value you buy (also known as going long) but if you think the market will fall in value then you sell (also known as going short). The amount you win or lose then depends on how much the price goes up or down.
The timescale for each trade varies, it can be anything from an hour, to a day or a much longer period.
Spread betting is a leveraged product which means that you are only required to deposit a fraction of the overall value of the trade. This margin enables you to magnify your return on investment, however, on the other side this means that losses will also be magnified so be aware, spread betting is not for everyone.
Prices quoted are given as two numbers, known as the bid and the offer prices. The bid or sell price is quoted first and the offer or buy price is quoted second. The spread is the difference between the bid and the offer.
For example,
The price for Ladbrokes may currently be 181.25p
The spread company will quote you two figures as follows,
180.75 - 181.75
The sell price is quoted first (180.75) and the bid price second (181.75), the spread being 180.75 to 181.75.
If you feel that the price of Ladbrokes is going to rise then you would buy at 181.75 but if you think the price is going to fall you would sell at 180.75.
The price movement is measured in points, for equities 1 point = 1 pence for indices it is usually 1 point = £1. You can place a bet of any value against every price movement, e.g. £1 per point, £5 per point of £10 per point.
The profit (or loss) that you make on a trade depends on the actual price movement. Using the Ladbrokes example above, assume that you had bought Ladbrokes at 181.75 for £10 per point and the spread moved to 183.75 - 184.75. This would mean that you were correct and you had made a profitable trade. The way you close a trade is to do the opposite of what you did originally, so as you originally bought the stock you would now sell the stock at the current sell price of 183.75.
Your profit is calculated as (sell price - buy price) multiplied by your bet stake. From the above example,
(183.75 - 181.75) X £10 = 2 X £10 = £20 profit
If you thought that the price for Ladbrokes was going to fall, then you would do the opposite of the above example, you would sell the shares and then when the price had fallen you would then buy. The profit is calculated in exactly the same way, (sell price - buy price) multiplied by your bet stake.
Prices do not always go the way they are expected to and so losses can occur. Using the example above, assuming that you had bought at 181.75 at £10 per point and were expecting the spread to rise but in fact it actually fell to 179.75 - 180.75. You would sell but now you would make a loss.
(179.75 - 181.75) X £10 = - 2 X £10 = £20 loss
It is very important to realise that if the spread keeps falling you could lose a substantial amount of money. For this reason, the spread companies allow you to put what they call a stop-loss in place. What this means is that if the spread reaches a level specified by you on a particular trade the position will be automatically closed at the desired price.
You can find a more detailed spread betting explanation at the paddypower trader academy.
Note: Please note that in line with regulatory instructions concerning short selling of UK, US, Irish, German and French financial stocks and all Australian financial instruments short selling is temporarily prohibited on certain stock. A full list of the affected companies are available from the spread companies web sites.
You can sign up and start betting immediately at the following sites. Click the banners to be taken directly to the sites.
Tradefair - This is Betfair's new home for the financial bettor and trader. Tradefair offers the familiar Betfair operational excellence to the financial bettor and trader. They also offer a £75 free credit for opening a new account.
paddypower - Ireland's leading bookmaker now offer a financial trader service. The site is full of information including a trader academy and a user manual to get you started spread betting. You can also open a demo account and practice before you open a live account with real money. paddypower also offer a research and data area where you can find out where to get valuable trading information. They also offer £75 free when you open a live account.
Victor Chandler offer an excellent financial spread betting service. This include a spread betting tutorial and the option to open a demo account before using real money.There are also trading models and a guide to economic indicators. They also offer a £500 cashback against losses for a limited time after opening a new account.
