Q: What is Spread Betting?
A: Spread betting (sometimes referred to as spread trading in the UK) is one product that a trader can use to enter the market to trade without buying the underlying shares. You can also use other products to trade like contracts for difference, futures, options or even buy the shares themselves as in traditional share trading.
So spread betting is a method of speculating on the price movements of an instrument without actually owning any shares or derivatives. A financial spread bet allows a trader to bet on whether they believe that the price quoted for a particular financial instrument, such as shares or the FTSE 100 index, is likely to strengthen (go up in value) or to weaken (go down in value).
This could be an index (for example the FTSE 100), a share (for example Tesco), a commodity (for example gold or oil) or even a currency (say GBP/USD). When spread betting you do not own the underlying instrument, you are betting on which direction you think the price will move in. Instead of buying shares or contracts, you would be betting in £'s per point movement in the price (a point may be 1p, 1c, 100th c or a $ depending on the instrument you are trading).
The profit or loss for a spread better is determined by the difference in the buy and sell prices. When you bet that the price will rise, it is called going LONG and when you bet the price will fall you are going SHORT.
It is easiest to explain using an example:
The FTSE 100 is trading at 4524-4525. This means that you can 'buy' (bet on the share price going up) at 4525. Or you can 'sell' (bet on the share price going down) at 4524. This quote has a spread of 1 point because the difference between the bid (the price at which you can sell) and the offer (the price at which you can buy) is 1 point. Different spread betting firms offer different spreads on each product.
You can buy (go long) if you expect prices to rise or sell (go short) if you think prices will go down and that the more right you are the more you win. This is just one of the factors that makes spread betting very attractive. Spread betting is becoming very popular in the UK as people can start with a small account which can be as little as £500 and it is great for traders who want to get in and out of a trade quickly as the costs per transaction are low compared to traditional share dealing.
Q: Why is it called Spread Betting?
A: The term spread betting is used because there is an additional spread around the market price and the reason it is called a bet is because if that term is used it means you are exempt from all capital gains taxes!
The 'spread' is the difference between the current price market participants will give you if you sell the stock (aka as the Bid price) and how much they'll charge you if you want to buy (aka as the Ask price). In spread betting the difference between the bid and ask price is a little bit larger as prices are derived from the underlying stock's regular bid/ask spread plus a little difference constituting the provider's commission. This provider's commission is usually more than compensated for by not having to pay capital gains tax, stamp duty, or income tax on dividends on your spread betting dealings...
So just remember that with spread betting you are betting on the price rising above the spread or falling below the spread. At any given time you will always have to buy at a higher price than you can sell at.
Q: What is a spread?
A: A bid/offer spread (also referred to as a sell/buy spread), is the difference between the prices at which you can purchase and sell spread bets. If the prevailing market price for silver is 18.75/85, the spread could be 18.85 - 18.75 = 0.10 (10 points).
Spread sizes vary by market depending on -:
the liquidity of the underlying market.
the volatility of the underlying market.
the amount of freely traded shares that exist for the relevant underlying instrument.
The workings of spread betting are very easy to understand. You simply have to go higher (long) or lower (short) than a price the bookie gives you. For instance, how many jelly beans fill in a one-litre bottle? If the spread betting provider offered a 240 to 250 range and you thought there were more than 250 you could go high (this is referred to as going long). On the other hand if you believed there were less than 240 you would go low (this is referred to as going short). To bet real cash you have to bet a certain amount per unit on the number of units in the bottle - the units in this case would be beans so if you went long at 250 at say £5 per unit and it later resulted that there were 280 in the bottle you would have been right by 30 beans. At £5 per bean you would win £150. Of course the opposite is also true and if there were just 230 beans in the bottle you would have been wrong by 20 beans implying a loss of £100
Q: How much does it normally cost to make a trade?
A: It doesn't cost anything per se, but you 'pay' the bid-ask spread. i.e. if for example let's say you are betting on the FTSE index and you can buy it at 3800 or sell it at 3801. The 1 pt difference is the margin and where the spread betting firms make their money.
Q: Show me a share example...
A: Suppose Tesco (the supermarket chain) share price opened the day at 360.50p and you thought that Tesco shares are worth buying in the short term.
Checking the daily rolling quote for Tesco you see the bid-offer spread being quoted at 354.1-355.1 and decide to buy (i.e. go long) at £100 per penny movement at 355.1p.
Let's say Tesco ends the day up at 363.50.
Bought £100 a point Tesco at 355.1p.
Sold £100 a point Tesco for an £840 profit (363.50-355.1 = 8.4 x100 = 840).
* However if Tesco ended the day down at 350 you would lose £240 (350-355.1 = -5.1 x 100 = -510).
To highlight the access provided by spread betting, referring to the above Tesco example again, betting £100 per penny movement would be the monetary equivalent of buying 10,000 shares as each penny movement in the share price can win or lose you £100.
Compare this to a stockbroker where you would need to put down £35,510 to buy the stock, this contrasts sharply to a spread bet where you only have to make an initial deposit (also known as the Notional Trading Requirement).
Some spread betting providers offer up to 5% NTR on blue chips meaning that you would need £1,775.50 to enter this trade. Be warned, however, that if the market were to move against you, you would be required to make additional payments to maintain your position.
Q: How does it differ to conventional betting?
A: In normal fixed odds betting, you take a view on a horse race or a football game and look for a win or lose situation. However, in financial spread betting, there is no finishing line. You are not looking for a final result at the end of the race. Instead, you are making a prediction about where prices will be in a single moment in time; spread betting is a way of backing your view on where the financial markets are going. With spread betting, the more right you are, the more you can win but the more wrong you are, the more you can lose – and your loss could be substantial if you don't use stop loss orders (covered later).
Q: What is a derivative product?
A: A derivative product derives its value from its underlying asset. The underlying asset can be a share, an index, a currency pair, commodity or indeed any other asset. Spread betting like CFDs are a form of a derivative product meaning that you do not own any of the shares you are trading but are simply trading on the direction of the share price. For every point the market moves in your direction you win multiples of your stake (the opposite is also true: for every point the market moves against you lose multiples of your stake!). Since you don't own the underlying asset but are betting on price movements you can profit from falling prices by taking a DOWN bet.
Spread Betting is a tax-free alternative to trading shares and financial markets. You are essentially betting on the performance of a share, index or commodity. You don’t own the share itself, you merely use it as an underlying instrument for your betting.
Q: How long has it been around?
A: Financial Spread Betting has been around just over 40 years and it has steadily increased in popularity over the last 10 years. Industry derivatives research shows that the average investor is now much more sophisticated and knowledgeable about financial matters than they were 10 years back. It is estimated that there are now over 400,000 people spread betting in the United Kingdom alone. During this time there has been a growing awareness of the advantages that spread betting has to offer over traditional trading on the financial markets.
Reproduced with permission of www.financial-spread-betting.com.
To learn more about spread trading visit: http://www.financial-spread-betting.com/Spread-trading-faqs.html
A: Spread betting (sometimes referred to as spread trading in the UK) is one product that a trader can use to enter the market to trade without buying the underlying shares. You can also use other products to trade like contracts for difference, futures, options or even buy the shares themselves as in traditional share trading.
So spread betting is a method of speculating on the price movements of an instrument without actually owning any shares or derivatives. A financial spread bet allows a trader to bet on whether they believe that the price quoted for a particular financial instrument, such as shares or the FTSE 100 index, is likely to strengthen (go up in value) or to weaken (go down in value).
This could be an index (for example the FTSE 100), a share (for example Tesco), a commodity (for example gold or oil) or even a currency (say GBP/USD). When spread betting you do not own the underlying instrument, you are betting on which direction you think the price will move in. Instead of buying shares or contracts, you would be betting in £'s per point movement in the price (a point may be 1p, 1c, 100th c or a $ depending on the instrument you are trading).
The profit or loss for a spread better is determined by the difference in the buy and sell prices. When you bet that the price will rise, it is called going LONG and when you bet the price will fall you are going SHORT.
It is easiest to explain using an example:
The FTSE 100 is trading at 4524-4525. This means that you can 'buy' (bet on the share price going up) at 4525. Or you can 'sell' (bet on the share price going down) at 4524. This quote has a spread of 1 point because the difference between the bid (the price at which you can sell) and the offer (the price at which you can buy) is 1 point. Different spread betting firms offer different spreads on each product.
You can buy (go long) if you expect prices to rise or sell (go short) if you think prices will go down and that the more right you are the more you win. This is just one of the factors that makes spread betting very attractive. Spread betting is becoming very popular in the UK as people can start with a small account which can be as little as £500 and it is great for traders who want to get in and out of a trade quickly as the costs per transaction are low compared to traditional share dealing.
Q: Why is it called Spread Betting?
A: The term spread betting is used because there is an additional spread around the market price and the reason it is called a bet is because if that term is used it means you are exempt from all capital gains taxes!
The 'spread' is the difference between the current price market participants will give you if you sell the stock (aka as the Bid price) and how much they'll charge you if you want to buy (aka as the Ask price). In spread betting the difference between the bid and ask price is a little bit larger as prices are derived from the underlying stock's regular bid/ask spread plus a little difference constituting the provider's commission. This provider's commission is usually more than compensated for by not having to pay capital gains tax, stamp duty, or income tax on dividends on your spread betting dealings...
So just remember that with spread betting you are betting on the price rising above the spread or falling below the spread. At any given time you will always have to buy at a higher price than you can sell at.
Q: What is a spread?
A: A bid/offer spread (also referred to as a sell/buy spread), is the difference between the prices at which you can purchase and sell spread bets. If the prevailing market price for silver is 18.75/85, the spread could be 18.85 - 18.75 = 0.10 (10 points).
Spread sizes vary by market depending on -:
the liquidity of the underlying market.
the volatility of the underlying market.
the amount of freely traded shares that exist for the relevant underlying instrument.
The workings of spread betting are very easy to understand. You simply have to go higher (long) or lower (short) than a price the bookie gives you. For instance, how many jelly beans fill in a one-litre bottle? If the spread betting provider offered a 240 to 250 range and you thought there were more than 250 you could go high (this is referred to as going long). On the other hand if you believed there were less than 240 you would go low (this is referred to as going short). To bet real cash you have to bet a certain amount per unit on the number of units in the bottle - the units in this case would be beans so if you went long at 250 at say £5 per unit and it later resulted that there were 280 in the bottle you would have been right by 30 beans. At £5 per bean you would win £150. Of course the opposite is also true and if there were just 230 beans in the bottle you would have been wrong by 20 beans implying a loss of £100
Q: How much does it normally cost to make a trade?
A: It doesn't cost anything per se, but you 'pay' the bid-ask spread. i.e. if for example let's say you are betting on the FTSE index and you can buy it at 3800 or sell it at 3801. The 1 pt difference is the margin and where the spread betting firms make their money.
Q: Show me a share example...
A: Suppose Tesco (the supermarket chain) share price opened the day at 360.50p and you thought that Tesco shares are worth buying in the short term.
Checking the daily rolling quote for Tesco you see the bid-offer spread being quoted at 354.1-355.1 and decide to buy (i.e. go long) at £100 per penny movement at 355.1p.
Let's say Tesco ends the day up at 363.50.
Bought £100 a point Tesco at 355.1p.
Sold £100 a point Tesco for an £840 profit (363.50-355.1 = 8.4 x100 = 840).
* However if Tesco ended the day down at 350 you would lose £240 (350-355.1 = -5.1 x 100 = -510).
To highlight the access provided by spread betting, referring to the above Tesco example again, betting £100 per penny movement would be the monetary equivalent of buying 10,000 shares as each penny movement in the share price can win or lose you £100.
Compare this to a stockbroker where you would need to put down £35,510 to buy the stock, this contrasts sharply to a spread bet where you only have to make an initial deposit (also known as the Notional Trading Requirement).
Some spread betting providers offer up to 5% NTR on blue chips meaning that you would need £1,775.50 to enter this trade. Be warned, however, that if the market were to move against you, you would be required to make additional payments to maintain your position.
Q: How does it differ to conventional betting?
A: In normal fixed odds betting, you take a view on a horse race or a football game and look for a win or lose situation. However, in financial spread betting, there is no finishing line. You are not looking for a final result at the end of the race. Instead, you are making a prediction about where prices will be in a single moment in time; spread betting is a way of backing your view on where the financial markets are going. With spread betting, the more right you are, the more you can win but the more wrong you are, the more you can lose – and your loss could be substantial if you don't use stop loss orders (covered later).
Q: What is a derivative product?
A: A derivative product derives its value from its underlying asset. The underlying asset can be a share, an index, a currency pair, commodity or indeed any other asset. Spread betting like CFDs are a form of a derivative product meaning that you do not own any of the shares you are trading but are simply trading on the direction of the share price. For every point the market moves in your direction you win multiples of your stake (the opposite is also true: for every point the market moves against you lose multiples of your stake!). Since you don't own the underlying asset but are betting on price movements you can profit from falling prices by taking a DOWN bet.
Spread Betting is a tax-free alternative to trading shares and financial markets. You are essentially betting on the performance of a share, index or commodity. You don’t own the share itself, you merely use it as an underlying instrument for your betting.
Q: How long has it been around?
A: Financial Spread Betting has been around just over 40 years and it has steadily increased in popularity over the last 10 years. Industry derivatives research shows that the average investor is now much more sophisticated and knowledgeable about financial matters than they were 10 years back. It is estimated that there are now over 400,000 people spread betting in the United Kingdom alone. During this time there has been a growing awareness of the advantages that spread betting has to offer over traditional trading on the financial markets.
Reproduced with permission of www.financial-spread-betting.com.
To learn more about spread trading visit: http://www.financial-spread-betting.com/Spread-trading-faqs.html
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