What Is Spread Betting?
Spread betting is simply a way of trading on a financial instrument without having to physically own it. You can spread bet on a wide variety of financial markets such as an index like the UK 100, individual companies such as Vodafone or commodities like oil – you can even trade on the prices of frozen orange juice and pork bellies!
Spread betting allows you to make potential profits whether a market is rising or falling. You may have a view for example, on whether a price of a share is going to move up or down. A buy trade would mean that you expect the market to go up, or you could place a sell trade in the expectation that the instrument’s price will fall. If you are right and the price moves in your favour then you will make a profit, but if you are wrong then you will make a loss.
The stake
When you open a spread bet, simply choose whether the price of that instrument is likely to go up or down, and nominate in pounds what size your stake is (minimum bet size of £1). Your profit or loss is the difference between the price at which you buy and the price at which you sell multiplied by your stake.
So, for example, if you buy £5 a point on a share like Vodafone and the price of the share rises 20 points you would make (£5x20)=£100. However, if it falls 20 points you would lose £100. For a more detailed example, visit the spread betting example trade.
Going long or short
As you do not physically own the product, but bet solely on price movements, you can make potential profits from falling markets as well as rising markets.
If you think that a certain financial instrument will rise in value, then you ‘buy’ the product, known as ‘going long’, with the aim of selling it at a higher price. However, if you think that a financial market will fall in value, then you ‘sell’ it first, known as ‘going short’, with the aim of buying it back at a cheaper price.
Margin trading
Spread betting is a leveraged product which means that you are only required to deposit a fraction of the overall value of the trade. This means you can place a trade without the need to put down the full value of that transaction as you would with a stock broker. Consequently your funds are not tied up in a single trade which means you can use the rest of your capital for other investments.
Margin enables you to magnify your return on investment. However, losses will also be magnified so it is advisable to use one of the free risk management tools such as a stop loss or limit order to help take control of your risk.
The spread
Prices of financial instruments are quoted in pairs known as the bid and the offer. The bid or ‘sell’ price is quoted first and the offer or ‘buy’ price is quoted second. The spread is the difference between the bid and the offer.
When opening or closing a position, you buy at the upper end and sell at the lower end – a bit like changing your holiday money at a Bureau de Change.
If you were viewing the price of a share like Vodafone for example, it might look like this:
The price to the left is the sell price and the price to the right is the buy price
If our Vodafone spread is priced at 120.25/120.55, that means you could either:
Buy at 120.55 if you think Vodafone will rise in value or;
Sell at 120.25 if you think Vodafone will fall in value
Spread Betting, is a leveraged product and carries a high degree of risk to your capital and it is possible to lose more than your initial investment. Only speculate with money you can afford to lose. These products may not be suitable for all investors, therefore ensure you fully understand the risks involved, and seek independent advice if necessary.
Digital Look Markets is a trading name of CMC Spreadbet Plc who are authorised and regulated by the Financial Services Authority 170627. Spread betting services are provided by CMC Spreadbet Plc trading as Digital Look Markets, to whom you have been introduced by Digital Look Ltd. All dealing, administration and settlement in relation to these services is undertaken by CMC Spreadbet Plc. You and CMC Spreadbet Plc not Digital Look Ltd will be counterparties to each transaction.
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