• Trading Guides: What is spread betting?

    Spread betting is one of the cheapest and most straightforward ways to speculate on financial markets. It allows you to follow your own judgement on whether the price of an asset will rise or fall. You can bet on all kinds of markets, including the share price of individual companies, price movements on commodities like oil and gold, currencies, bonds and global stock indices, such as the FTSE, German Dax, Japanese Nikkei, and the US Dow Jones Industrial Average.

    Spread betting on currencies (also known as foreign exchange, FOREX or FX) allows you to speculate on how one currency will move in relation to another. For example, if you think the British pound will strengthen against the euro or the US dollar will weaken against the Japanese yen then there’s a spread bet for you.

    One of the great advantages of spread betting on FOREX is that 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 taken when spread betting. Fortunately, companies like Spread Co offer a number of ways to control your risk, such as stop losses and guaranteed stop losses.

    How it works

    Let’s say you’ve decided which FOREX market you want to trade in. Spread Co will offer you a quote which will be constantly updated, depending on how the underlying market is moving. This quote consists of a bid (selling) price and a, slightly higher, offer (buying) price.

    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. As an example, let’s consider the EURUSD - the most actively traded currency pair in the world. Here’s a spread betting deal ticket for the EURUSD:

    The difference between the lower (sell) price and the higher (buy) price is 0.00008 points (1.10544 minus 1.10536 = 0.00008) – one of the lowest dealing spreads around.

    Spread Co’s minimum bet for all currency pairs is £1 per point. If you bought and sold (or sold and bought) £1 per point on the EURUSD, the cost in terms of the dealing spread would be £0.80 (£1 x 0.8).

    Our spread of 0.00008 on the currency pair is expressed as 0.8 when working out the cost of the spread per £1 per bet. This is because our round-trip spread (to open and close a bet) is 0.8 of a full point, so the cost in terms of spread for a £1 bet is £0.80

    Let’s explain this in more detail:

    Sometimes it can be confusing to know which numbers you’re actually betting on. At Spread Co, the number of pounds per point that your spread bet applies to is the last big digit of the price. As you can see in the example of the EURUSD, the £1 per point isn’t applied to the very last digit of the price, but the one just to the left of it - the big one.

    The outright cost would be higher if you bought and sold £10 per point, and it would be higher still if you simultaneously bought and sold £50 per point. In the first case, the spread cost is £8.00 (£10 x 0.8 = £8.00) and in the second case, it’s £40 (£50 x 0.8 = £40). In all these cases, the spread itself is constant, but the actual cost varies accordingly with the bet size. Also, it is worth noting that as your spread bet is in pounds per point, all your profits and losses are also in sterling. This is not the case with outright FOREX or some CFD trades, where profits and losses are often in a different currency.

    Buying or selling a currency in a pair

    As you can see from the dealing ticket above, you “sell” at the lower bid price of 1.10536, or “buy” at the higher offer (or “ask”) price of 1.10544

    When dealing in FX always think in terms of the first-named currency. For example, if you expect the euro to fall against the US dollar you would sell the EURUSD at the lower end of the spread.

    If you think the EURUSD will rise (the euro is set to appreciate in value, relative to the US dollar), you would “buy” for example £1 per point at 1.10544. It’s very important to understand exactly what “one point” means, as it varies across different financial instruments. As far as the EURUSD is concerned, a point is 0.0001, so if the EURUSD goes from 1.10544 to 1.10554, that is a full point. Consequently, in this example, for each point the EURUSD goes up, you will make £1.

    Let’s say the EURUSD rises to 1.11554 and you decide to close out your bet. Your profit will be £100 (11155.4 – 11055.4 = 100 x £1). Hopefully, you can see why we’ve shifted along the decimal point, as this makes it clearer which digit your £1 per point bet applies to.

    The beauty of spread betting is that it is just as easy to bet on a currency falling as it is on a currency rising - if you thought that the euro was set to decline against the US dollar, you could have sold at 1.10536. The other thing about spread betting that makes it so attractive is that you can close your bet out any time after you have opened it. This means you can take short-term positions, as well as ones with a longer time horizon. Spread Co makes two-way prices on currencies 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.