Spread Betting Explained

So, what is the Bet? Unlike traditional share trading, you never own the actual share or commodity. You only make a call on whether you think it will go up or down in value. You stake a certain amount of money per point movement; the more it moves in your favour the more money you make, the more it moves against your prediction, the more you lose.

Ehat is the Spread? Concept is same like a stock future. The spread is the difference between buying ans selling price. You will buy at the higher price if you think the market will rise (Going Long), or sell at the lower price if you think the market will fall (Going Short). The tighter the spread, the smaller the market has to move for you to make a profit.

Now that your concept is clear, US readers you might want to skip rest of the article as SPREAD BETTING IS LEGALLY NOT ALLOWED IN USA. Spread betting can be done in UK, few other european markets and Australia only at this time. They are operated by brokers, known as spread betting companies.

What can you Spread Bet on?

Pretty much everything that can be individually traded are in scope of spread betting.

  • Stock market indices – This is the most commonly traded aspect in spread betting. You can spread bet on almost all major intl. markets
  • Individual Stocks – Shares in individual companies from any market in the world
  • Commodities – Almost all commonly traded commodities, metals, fodder and agricultural produces.
  • Currencies – Foreign Exchange, USD, EUR, GBP, AUD etc.
  • Interest rates and Bonds – Short term or long term interest rates, Government Bonds or gilts.

How does a Spread Bet work?

First, you select your target, whether its a stock index or an individual stock you want to bet on.

Let’s take a Dow for example

Start by checking the price quoted by the spread betting company. It will be the actual index share price. There will be always be two prices, a buying price and a selling price; example 11900 – 12050

As first step you must decide if you expect DOW to go up higher than the buy price, or go down lower than the sell price. If you think it will go up, you buy DOW at the buy price, if you think DOW to go down, you will sell DOW at the sell price.

As second step, you must decide how much you are betting, that is the amount of money you gain or lose per point of movement on the value of the index. It is always expressed in currency per point of movement e.g. £10 per point.

If you buy DOW at 11900 and it moves up by 100 points and at that point you decide to sell, you made a profit of 100 (points) * 10 (per point) = £1000. You may loose a huge amount of money if luck is not in your side.

If you sell to open your trade, you sell at the lower price, and when you close the trade, you must close at the higher price quoted at the time. You can close a trade at any time whether you are making a profit or a loss. You do not have to meet any specific value on any specific date.

You can put stop loss the same way you do with your loosing stocks to cut down your losses.

Spread betting companies require a security deposit to cover potential losses, known as margin requirement.

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