What is Financial Spread Betting?
Financial Spread betting is one of the most exciting and fastest growing ways of speculating on the movement of an underlying share or index and for many investors it has become a flexible and cost efficient alternative to trading ordinary shares.
Advantages of Spread Betting
NO Stamp duty is payable (saving 0.5% compared to a traditional share purchase.
Tax Free Profits: Profits on spread betting are not subject to capital gains tax*
No direct commissions or fees are paid to the spread betting company
You can profit from falling or rising markets
They are traded on margin therefore bets can be placed with a relatively small initial outlay
A single account can give you Access to far greater range of financial markets.
You can limit your risk using a ‘Stop Loss'
The ability to place very small bets, some companies let you place a trade of as low as 1p per point.
* Tax Laws are subject to change.
Disadvantages
Some markets may be very volatile and unless you place a stop loss you could incur very large losses if your position moves against you
It is less suited to the long term investor, if you hold a bet open over a long period of time the costs associated increase and it may be more beneficial to have bought the underlying asset.
You have no rights as an investor, including no voting rights and you will not benefit from dividends.
What can I trade?
Because you are not actually buying or selling the actual underlying instrument. the range of instruments that you ‘bet' on can be far greater than simply underlying shares.
You can bet on the spread bet of:
Stock market indices such as the FTSE or NASDAQ
Individual shares from the FTSE 100 and FTSE 250, but also from leading US and European shares
Currencies, FX
Commodities such as metals and oil
Interest Rates both short term and long term
Futures and options
Bonds
How does a Spread Bet work?
A spread bet is a bet on the future movement of an underlying instrument. In basic terms if you believe the underlying instrument is going to rise you place a buy bet, if you believe the underlying instrument is going to fall you place a sell bet. Unlike ordinary share trading you can befit from falling as well as rising shares or other financial instruments.
A spread betting company will quote you two prices for any underlying instrument a Bid (the price that you can sell at) and a ‘offer' just like you would for a normal equity (the price that you can buy at)the difference between these is known as the spread.
The movement of the underlying instrument is measured in points eg. For equities 1 point = 1 pence for indices usually 1 point = £1 and you can place a bet of any value against every point movement in the underlying i.e. £1 per point, £5 per point or £10 per point etc.
To close a bet you simply place an opposite bet on the specific instrument at the same £ per point. To close a buy bet you sell at the current quote and to close a sell bet you buy at the current quote.
Therefore the profit or loss that you make is the points difference between the opening bet and the closing bet multiplied by the value of your bet per point (i.e. £1 per point, £5 per point or £10 per point etc.)
The best way to understand how a spread bet works is to look at an example
EXAMPLE: Ordinary Share Spread Bet
Vodafone is currently trading 130 – 130.5
Investor A believes that Vodafone is going to rise and places a buy bet at 130.5 for £10 a point.
Investor B has the opposite view and believes that Vodafone is going to fall and places a sell bet at 130 for £10 point.
Scenario 1
Vodafone rise to 135 – 135.5
Investor A's prediction is correct Vodafone has risen and he closes his position with a sell bet at 135 and subsequently makes a £45 profit ( 4.5 points x £10)
Investor B decided to cut her losses and closes her position at 135 and makes a £50 loss (5 points x £10)
Scenario 2
Vodafone falls to 126 – 126.5
Investor A's prediction is incorrect and he decides to close his position by placing a sell bet at 126 making a loss of £40 (4 points x £10)
Investor B's position has move in her anticipated direction and she decides to close her position by placing a buy bet at 126.5 making a profit of £35 (3.5 points x £10)
EXAMPLE: Index Spread Bet
The theory of spread betting is exactly the same whatever instrument you wish to trade on, one of the most popular forms of financial spread betting is on world indicie such as the FTSE 100 or The Dow Jones :
The FTSE 100 is currently trading at 4367 and XYZ spread.com is quoting a spread of 4363 – 4370 on the Daily FTSE.
Investor A believes that the FTSE is going to rise and places a buy bet at 4370 for £5 per point
A week later the FTSE has risen and the daily FTSE spread is now 4400 – 4406
Investor A decides to place a sell bet at 4400 to close out their position, and they make a profit of £150 (30 points x £5)
Conversely, The FTSE falls and the current FTSE spread is now 4330 – 4336 and Investor A decides to close out his position by placing a sell bet at 4330 and makes a loss of £200 (40 points x £5) |
I enjoy betting on sports and normally do alright but struggle with sport spread betting i really can t predict scores! However i have noticed that 0 – 0 draws are prominent in football and rugby games normally a try or penalty in it! So occasionally ill have a bit of a go at online spread betting just see if i can guess more then anything!