How it worksWith spread betting, you don’t actually buy the underlying asset you want to trade. You just take a view on the prices offered by a spread betting provider, such as Spread Co, as to whether the price will rise or fall. As you don’t have to buy the underlying asset, spread betting providers allow you to trade on “margin.” What this means in practice is that you only have to put up a small percentage of the value of the underlying asset to control a large amount of it. In other words, you are dealing with leverage. As a result, your potential profits are magnified, but so are your losses. For this reason, great care must be exercised in spread betting. Fortunately, companies like Spread Co offer a number of ways to control your risk, such as stop losses and guaranteed stop losses. Let’s consider the FTSE100 (the index of the top 100 UK companies by market capitalisation). Spread Co is constantly making a dealing spread, or quote, on the “UK100”, based on the underlying FTSE index. 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. Let’s assume that you get a dealing quote of 6221.1 to 6221.9 – this means that you can “sell” at the lower bid price of 6221.1 or “buy” at the higher offer (or “ask”) price of 6221.9. The difference between the two prices is the spread, which is one of the two charges involved in spread betting (the other charge is called the financing adjustment). The spread is always there, wrapped around the underlying market price. You pay half of the spread when you open the bet and half when you close it. Let’s say you think the index will rise, so you “buy” £1 per UK100 point at 6221.9 - 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 6221.9 and subsequently sell it at 6222.9 (in other words when our spread on the UK100 is 6222.9 – 6223.7), that is a full point. Consequently, in this example, for each point the UK100 goes up, you will make £1.
Let’s explain this in more detail:Markets can move very quickly sometimes, especially if a significant event happens or an important piece of financial data is released. Fortunately, there’s absolutely nothing to stop you closing your bet within seconds of opening it. At the same time, you can leave bets open for days, weeks, months, or even years in some cases. This is a good indication of how quickly you can buy and sell in spread betting. Let’s say our UK100 rises to 6265.4 soon after you open your position and you decide to close out your bet - your profit will be £43.5 (6265.4 – 6221.9 = 43.5 x £1). The beauty 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 6221.1. As mentioned earlier, the great thing about a spread bet is that you can close it out any time after you have opened it. This means you can take short, medium, or long-term positions. 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. Spread Co is open 24 hours a day, five and a half days a week.
Disclaimer: Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable 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 a marketing communication it is not subject to any prohibition on dealing ahead of the dissemination of investment research, although Spread Co operates a conflict of interest policy to prevent the risk of material damage to our clients.