CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 61.4% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
When you’re spread betting or trading CFDs, spreads are important.
Tight spreads can help you make a profit quicker. Fixed spreads help you trade with confidence.
Our tightest spreads are available up to a maximum of £50 a point after which they increase on a sliding scale. Visit our market range of markets pages for more information.
When you place a spread bet or trade CFDs there are two prices you need to be aware of. The first is the offer or the buy price. This is the price you’ll pay to buy an asset.
The other price is the bid or sell price which is the price you can sell an asset at. The bid price will always be lower than the offer price. The difference between these two prices is called the spread.
Let’s say the bid price of an asset was 125.6 and the offer price was 126.4. The difference between the two prices is 0.8, so that’s the spread.
If you think the price of an asset will rise, you ‘go long’. This means you buy the asset now with the hope of selling it again at more than your buying price.
When you ‘go short’ you’re betting that the price of an asset will fall. This time you sell the asset at the bid price and hope to buy it again when the offer price falls below that of your original selling price.
You can only make a profit with spread betting or CFD trading when the change in the underlying price is more than the amount of the spread.
For example, a two point spread means the asset price has to move at least two points before you start making a profit on the trade. If it moves by less than two points when you close your position, you’ll make a loss.
Tight, or narrow, spreads offer you the best opportunity to profit from small movements in prices and values.
Stop loss and limit orders are risk management features used in spread betting and CFD trading. They let you limit your loss potential or lock in your profit when the asset you’re speculating on reaches a defined value.
When you have a variable spread, a large and rapid change in the spread value can trigger an instruction to close the position. If you’re trading with variable spreads you need to keep a close eye on your positions to make sure these features aren’t activated at a time which doesn’t suit your trading strategy.
With fixed spreads you can trade with confidence in the knowledge that the spread won’t change during normal market trading hours.
For example, if the spread is set at 0.8 for that particular type of asset, that will always be the spread throughout the trading day.
As the name suggests, variable spreads don’t have this certainty. Companies who offer variable spreads may advertise a headline rate which could be lower than the fixed spreads offered by companies such as Spread Co.
For example, they could advertise spreads ‘from 0.75’ but this could increase to as much as five points at certain times of the day. This can create problems if you’re forced to close a position at a time when the spread is at its widest.
Two traders believe that sterling will strengthen against the US dollar. They both buy £10 a point on GBPUSD at 1.2520. Trader A’s spread is fixed while trader B’s spread is variable.
The price rises and both decide to sell.
For trader A the price is 1.2525-1.2526 He sells at 1.2525 and makes a £50 profit.
When trader B comes to sell, he discovers that his initial spread has now widened to 1.2524-1.2526. He sells at 1.2524 and makes a £40 profit.
Both traders placed the same trade at the same time and sold at the same time. Trader A made £10 more on the deal simply because he bought and sold with a fixed spread.