Spread Betting and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71.7% of retail investor accounts lose money when trading Spread Betting and CFDs with this provider. You should consider whether you understand how Spread Betting and CFDs work and whether you can afford to take the high risk of losing your money
How does Spread Betting Work? : Trading Guides
What is Spread Betting and how does Spread Betting work?
Spread betting is a type of trading that involves speculating on the price movement of various financial instruments, such as company shares, equity indices, currency pairs, or commodities. Traders make predictions on the direction in which the price will move. If the price moves in the anticipated direction, traders can make a profit. The extent of the profit depends on how accurately the prediction aligns with the price movement. However, if the price moves against the prediction, traders can experience losses. It’s important to note that Spread Betting carries the risk of potential financial loss if the market moves unfavourably.
What is leverage in Spread Betting?
Spread Betting offers a unique approach to speculation where you don’t actually purchase the underlying asset you want to trade. Instead, you take a position based on the prices provided by a Spread Betting provider, like Spread Co, on whether the price will rise or fall. This allows you to engage in trading on “margin.” Essentially, it means that you only need to commit a small percentage of the total value of the underlying asset to control a much larger position. This leverage amplifies both potential profits and losses. While Spread Betting can lead to significant gains, it also carries increased risk. Therefore, it is crucial to exercise caution and careful risk management when participating in Spread Betting activities.
How does Spread Betting work: FTSE100 Spread Betting example
Spread Co is constantly making a dealing spread, or quote, on the “UK100”, based on the underlying FTSE index (the index of the top 100 UK companies by market capitalisation). This quote consists of a bid (selling) price and a, slightly higher, offer (buying) price. The spread between the two can be as narrow as 0.8 points, which means that Spread Co’s charge for opening and closing a spread bet is one of the lowest available. (0.8 during cash market hours, max stake £560).
It’s very important to understand exactly what “one point” means, as it varies across different financial instruments. As far as the UK100 is concerned, a point is 1.0, so if you buy the UK100 at 6920.8 and subsequently sell it at 6921.8 (in other words when our spread on the UK100 is 6921.8 – 6922.6), that is a full point. In this example, for each point the UK100 goes up, you will make £1. And one of the great advantages of spread betting is that you can speculate on a market (including individual company shares) falling as well. So if you thought that the UK100 was set to go down in value, you could have sold at 6920.0. On top of this, spread betting providers like Spread Co make two-way prices on certain financial instruments even when the underlying markets are closed. They charge a wider spread for this service, but it can be well worth it when you consider how world events and fresh news stories are moving markets all the time.
Let’s assume that you get a dealing quote of 6920.0 to 6920.8 This means that you can “sell” at the lower bid price of 6920.0 or “buy” at the higher offer (or “ask”) price of 6920.8.
Let’s say you think the index will rise, so you; “Buy” £1 per UK100 point at 6920.8.
Let’s say our UK100 rises to 6973.6 soon after you open your position and you decide to close out your bet; Your profit will be £52.80 (6973.6 – 6920.8= 52.8 x £1).
You can make a lot of money quickly from a relatively small outlay, but you can lose money fast, too. In the above example where you bought £1 on the UK100 at 6920.8. If the underlying index fell, instead of rising, and you sold your position to close at a price of 6855.4; You would lose £65.40 (6920.8 – 6855.4 = 65.4 x £1).
The MINI UK100 offers the opportunity to participate in at a stake value of 10 pence per point. so a similar one point move on a £1 stake on the MINI UK100 would generate a Profit or Loss of 10p for every 1 point move.
What is Margin requirement?
Margin refers to the amount of money that a trader needs to deposit with their broker in order to open and maintain a trading position. It is a form of collateral or a security deposit that ensures the trader can meet any potential losses they may incur while trading.
In the context of Spread Betting, margin allows traders to control a larger position than their initial deposit would typically allow. This leverage amplifies potential gains or losses. The margin requirement is usually expressed as a percentage of the total value of the underlying asset. For example, if the margin requirement is 5%, a trader would need to deposit 5% of the total value of the position as margin.
It’s important to note that margin trading carries a higher level of risk, as losses can exceed the initial deposit. Traders must carefully manage their margin and use risk management tools like stop-loss orders to limit potential losses and protect their trading capital.
How can I manage my risk?
Proper risk management is crucial in spread betting to increase the chances of success. This involves thorough trade planning and the use of a stop loss order. A stop loss is a predetermined level at which a trade will be automatically closed out.
It’s important to note that the placement of a stop loss should not be arbitrary. It should be carefully chosen, taking into account significant technical levels such as support and resistance, as well as employing effective money management principles. By considering these factors, traders can mitigate potential losses and manage risk effectively.
How does Spread Betting work: price gapping
In Spread Betting, price gapping refers to a situation where there is a significant and sudden jump or “gap” in the price of a financial instrument between two consecutive trading periods. This can happen when there is a significant event or news announcement that causes a rapid change in market sentiment and trading activity.
Price gapping can occur in both directions, either upward or downward. When a price gap occurs, it means that there is a noticeable difference between the closing price of the previous trading period and the opening price of the next trading period.
In Spread Betting, price gapping can have an impact on your trades, particularly if you have open positions at the time of the gap. If the price gaps against your position, it can result in a larger loss than anticipated or trigger your stop loss order at a worse price than expected.
It’s important to be aware of the potential for price gapping and to consider the associated risks when placing spread bets. Traders often employ risk management strategies such as setting appropriate stop loss orders and being cautious during periods of high market volatility or significant news events that could increase the likelihood of price gaps occurring.
Disclaimer
Spread Co is an execution only service provider. The material on this page is for general information purposes only and nothing contained herein constitutes (or should be taken to constitute) financial or other advice which should be relied upon. It has not been prepared with your personal circumstances, financial situation, needs or objectives in mind, therefore any actions taken or not taken by any person on the basis of this material is done entirely at their own risk. Spread Co accepts no responsibility whatsoever for any such actions, inactions or resulting consequences. No opinion expressed in the material shall amount to (or be taken to amount to) an endorsement, recommendation or other such affirmation of the suitability or unsuitability of any particular investment, transaction, strategy or approach for any specific person. This material has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. As such, this communication is not subject to any prohibition on dealing ahead of the dissemination of investment research. Nonetheless, Spread Co operates a conflict of interest policy to prevent the risk of material damage to our clients.
