Spread Bets

Index trackers, highly-leveraged CFDs, spread bets, short-selling and algorithmic programmes are drawing increasing attention from traders and investors ready to take advantage of short-term market fluctuations European markets are in the grip of the sovereign debt crisis.

Spread trading’s low margin feature means that you essentially have to deposit about 2% to 30% of the total market exposure of your position, depending on the market you choose to trade. When compared to normal shares dealing, the potential for profits/losses as a return of initial capital outlay is likewise amplified. However, here it is worth remembering that losses can exceed the initial outlay.

But how do spread bets work? You multiply the share price by the amount per penny (it’s easier to understand if you understand that penny = point ). A £100 a point bet at 95p that Afren stock will rise is the same exposure as buying £9500 of shares. If you don’t understand this basic fact, you should stay away from spread betting! Especially if you are short…

Compared to traditional buying shares, spread trading permits you to gain exposure to price movements in a stock market that is both rising and falling. Suppose that after you have conducted comprehensive analysis of a particular market, you decide on whether you think it will rise or fall. If you believe that the market is likely to rise, you take a long position (buy). Your profits will then rise in parallel with the increase in the asset price of the market you are betting on, on the basis that you were correct and the market’s price does in fact rise! However, your analysis may turn out to be wrong and should the market fall your losses will likewise increase in line with any fall in that price.

Short The Falling Markets

With all the doom and gloom in the financial world, it’s hard to see how you can trade profitably these days. But for traders in the UK, spread betting provides a accessible tool to short sell the falling markets, tax free (tax laws can change remember).

Any spread betting company will provide you the facility to buy or sell any market your interested in. So there would be nothing to stop you from short selling the FTSE or HBOS or any other market you feel is going to drop in value.

This is what makes spread betting such a flexible and powerful tool. You can use it not only to trade on market gains, but to trade on falling markets.

Example: Going Long on Shares

Let’s take the case where you believe that Marks & Spencer shares will rise and you decide to ‘go long’ i.e. taking a long spread bet position, buying at £10 per point at the buy price of 351p.

If your prediction proves correct, and the stock price moves up to 400p you may decide that its time to bail and you decide to close your trade. As a result, you would end up with a tax-free* profit of £490 [(400 - 351) x £10 per point].

On the other hand if the market moved against your position and Marks & Spencer fell to 302p, you would net a £490 loss.

Example: Going Short on Shares

Let’s now suppose that taking the same example above you believed that Marks & Spencer shares were overpriced and due for a correction. You could go short i.e. taking a short position and say sell at at £10 per point, at the sell price of 349p.

In the next few days, the market moves in your favour and the stock price falls; when Marks & Spencer stock reaches 300p, you decide to exit and take your profits, closing your spread trade by buying back at £10 per point at 300p.

By selling Marks & Spencer stock at 349p and buying back at 300p – with a £10 per point stake size – you make a profit of £490. Of course had your prediction been proven wrong and had Marks & Spencer shares were to rise to 398p, you would have net a loss of £490.

Of course, you are not limited to individual shares and can trade many other different markets. Spread betting providers permit you to speculate on entire stock-market indices, like the FTSE 100 (UK 100) or Dow Jones 30 (Wall Street), on commodities such as gold and crude oil, currencies, government bonds and interest rates. And importantly you can deal in all these markets from just one single account!

Regarding spread betting, yes it is a fantastic tool if you take a measured and logical approach and cover your ‘holding’. In fact I’d say, financial spread betting is a very flexible speculative tool which allows for all sorts of styles of trading and investing in the financial markets. Spread betting involves using leverage. Spread bets permit a trader or investor to deposit a relatively small amount (referred to as initial margin) to control a comparatively much bigger market exposure. Leverage can work in your favour but it can also work against you if the market moves in the opposite direction of your trade. For this reason leverage can lead to equally large profits or losses. For instance, if you are upbeat regarding the prospects of a company you could either buy 10,000 shares in the company at say £1 a share and pay £10,000 to your brokerage company or buy a spread bet at £10 a point and use £1,000 as initial margin (i.e. open a spread trading account and deposit £1,000). For experienced speculators, leverage provides them with the possibility to take advantage of market opportunities which they would otherwise miss.

Most people who spread bet lose money and that is why they will never be subjected to CGT – the Revenue would LOSE money as the previously non-relievable losses are used to cover other capital gains.

So yes – you could look into spread betting, but its imperative you understand the risks/margins etc. There are no dealing costs per transaction, but rather a small spread (on the buy and sell price) that the firm uses to make money each time you trade.  With modes sums you might want to consider swing trading (2-5 days), rather than day trading.  Otherwise, you risk wiping out your gains by the numerous dealing costs.

Spread bets are more about how much you can risk (% of your overall bank) per trade for a given potential reward, rather than how much you can earn as a minimum. Being consistent (and that doesn’t mean winning every trade) is probably the best next step. Generally speaking risk no more than 2% of your bank on any given trade. If you hit a losing streak, then drop the % even further.

Note: With stocks, you need to know where the market is going – most constituents follow the market and either outperform/underperform it but the trend is set invariably by the market. So whilst I do this, the bulk of my investments are in stocks. I keep an eye on put/call ratios and momentum oscillators to determine when the market is toppy or oversold – you might not get the tops/bottoms but over a slightly longer timeframe (1-6months plus)it really doesn’t matter that much.

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Spread bets are type of bets offered by the sports books or by the recently available financial spread betting companies. The spread bet is a margin bet in which the gambler chooses whether the trend of the bet will go above the spread offered by the sports book or the financial spread betting company, or below.

A good example for spread bet would be a spread offered by the financial spread company in which the oil is between 60-62 USD a barrel and the gambler needs to place a bet on whether the oil price will go up (long) or down (short) below the price offered in the spread. The price is compared to the market price at the end of the bet and then if the bet is won, the gambler will win the bet amount times the difference from the market price and the spread. For example if the market price of the oil at the end of the bet is $64, and the gambler won this bet (meaning the bet was long) this means the gambler won his bet amount times $2 .

Imagine yourself what happens if there’s a jump and the oil price is $70 at the end of the bet mentioned in the example above? That’s right. That’s why spread bets are popular among gamblers. So popular that it’s the 3rd most popular time of bet.

There are two types of spread bets. One is the sports spread bet like horse racing, basketball and so on and the other was introduced recently, the financial spread bet in which the gambler can place bets on the financial markets, on stocks and shares and other commodities.

In the United Kingdom spread betting was regulated and only gambling companies working according to the regulations and laws are permitted to accept UK gamblers. This gives a protection to the gambler as well as tax free gambling since the spread betting free company pays a fee to the regulation.

If you are familiar with spread betting and you are looking to start spread betting on financial markets, you got to the right place. We offer all type of spread bets including financial spread betting on all type of markets FTSE, the German Bursa the Nasdaq as well as the world wide known commodities and it’s all live based on the current market value which means you can only spread bet during the time of trade.