Imagine this scenario about a fictional computer manufacturer called Qwerty Corp:

Placing a short spread bet

Qwerty Corp is trading at 222.00/224.50. You think that Qwerty Corp is over-valued and the share price may fall so you decide to bet on its price going down.

You place a down bet (also known as going short) of £1 per point at 222.00

Since you are new to spread betting you trade the minimum amount of £1 per point, which is the equivalent of 100 shares in the real market.

Margin

Qwerty Corp is margined at 15% - this means that you only require 15% of the total position’s value to open a trade and this will be allocated from your account as initial margin. In this example, the total margin will be £33.30.

Remember, if the share price moves against you it is possible to lose more than your initial £33.30 margin requirement.

Closing your position

Your prediction is correct as the next day Qwerty Corp issues a profit warning and the share price falls by 50 points to 172.00 / 174.50. You decide to close your trade and buy back at 174.50.

You have made 47.5 points (222.00 - 174.50) x £1 = £47.50 profit.

Should the market move against you

Had the price risen due to a rumour of a takeover bid increasing the share price by 18 points to 240.00 / 242.50 you may decide to close your position at a loss by buying back at 242.50. This is a difference of 20.5 points (222.00 - 242.50) x £1 which is a loss of £20.50 to you.

This example uses a stake of £1 per point but you can trade in any multiples of £1, for example £3 or £10. If you had traded with a stake of £5 in this example you would have made a gross profit of £237.50 or a loss of £112.50 (plus or minus a financing). Trading with larger sizes increases your risk so make sure you understand the risks involved. Remember that all profits made from spread betting are tax free. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

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.