To help you understand how Spread Betting works we have outlined some example trades. If you would like to know more, please call one of our friendly dealers who will be happy to help.

Example 1. Buying shares in BP
You think that the fall in BP’s share price has been overdone and they now look like an attractive buy around 320p. You want to buy the equivalent of 5,000 shares @ 320p. As you can spread bet BP’s shares with a 5% initial margin you only need to have £800 in your account rather than £16,000 for the equivalent shares position.

To replicate this position, you would buy £50 a point of BP at 320p – just like with 5,000 shares of the underlying, £50 a point will make you £50 for every 1p movement in the share price of BP. If BP goes up to 350p, you make 30 X £50 or £1,500. If BP goes up to 400p, you make 80 X £50 or £4,000. And because spread betting is currently free from Capital Gains Tax*, you do not pay a penny of your profit in taxes.

Of course, there are risks to every trade – in this instance, if BP shares dropped overnight to 300p, you would lose 20 X £50 or £1,000. If you only had £800 in your account, this would allow the shares to fall to 304p (16p) before you were closed out of the position for an £800 loss (16 x £50). If you wanted to allow for more downside on your trade, you would need to put a bigger amount of margin in your account. For example, if you wanted to buy at 320p, but have a stop loss at 290p, then you would need £1,500 of margin in your account to allow for £50 X 30 pence of a fall.

Example 2. Shorting GBP Versus the US dollar
You’ve done your research and have watched the GBPUSD currency pair for a while. You have identified that there is strong resistance at the 1.5500 level and again at the 1.5525 level and you feel that sterling is currently overvalued versus the dollar.

You decide that as GBPUSD approaches the 1.5500 level you want to sell it short. So you place a sell order for £5 a point at 1.5495, with a stop loss at 1.5535. This requires £200 of initial capital, as placing a £5 a point bet with a 40 point stop loss requires £200 of margin.

Now if GBPUSD approached 1.5500 and trades through 1.5495, your order will be executed. If the resistance holds again at the 1.5500 level, and GBPUSD starts to drop, you make £5 for every pip it falls below 1.5495. If it drops to 1.5450 and you close the trade, you make 45 X £5, or £225. If you didn’t close it and it fell all the way to 1.5200 you would make 295 X £5 or £1475.

On the other hand, if the resistance at 1.5525 was broken and GBPUSD rallied to your stop at 1.5535, then you would lose the full 40 pips or £200.

Example 3: Selling shares to protect your portfolio.
You have built up a portfolio of shares in a company, but you are now worried that they are going to fall in value – you don’t want to sell your shares just yet, but want to protect yourself against a market fall. You have £50,000 worth of shares in GlaxoSmithkline and they are currently trading at 1200p. You decide to sell £41 per point at 1200p to hedge off the risk in your shares.

Over the next week shares in GSK drift towards 1100p. Your 4167 shares are currently worth £45,837, a drop in value of £4,163. On the other hand though, your short spread bet of £41 a point is in profit by 100 points, making a profit of £4,100 almost offsetting the entire fall in value of your shares. You can now either close your spread bet to realise the profit, or just leave the position open, protecting your equity position against any further losses.

*Please note: tax treatment may depend on individuals circumstances and tax laws may be subject to change.