Financial spread betting can seem like a complicated method of trading. There are lots of variables and plenty of factors for you to consider before you take the plunge and execute any deals.
A few years ago, the Financial Conduct Authority found that more than 80% of people lost money on spread betting.
So, if you’re new to the concept but are interested in getting started, it’s crucial that you understand it’s not a get-rich-quick scheme, but one that represents a genuine risk of making a loss. Financial spread betting is not to be confused with sports spread betting, widely thought to have been invented by maths teacher Charles K. McNeil in the 1940s.
But what exactly is it?
What is spread betting and how does it work?
Spread betting is a type of financial trading. It differs from stocks and shares trading, however, in that you never own the underlying asset. Instead, you are essentially speculating on whether the value of the asset will go up or down by choosing to buy or sell.
The buy price is known as the ‘ask’ or the ‘offer’ and the sell price is known as the ‘bid’. The spread is the difference between these two figures, calculated in so-called “points”. The basic idea is that if you think the value of the asset will go up, you buy. If you think its value is set to fall, you sell.
An example of spread betting
Let’s say you believe a single share in a company is set to rise from its current value of £1.20, so you want to buy. You are quoted a spread of £1.20 / £1.24 (in this instance four points) and you open a position at £1 per point. There is a natural wiggle room that the share usually operates in, which normally won’t be calculated into the bet itself. Instead, you are waiting for it to leave this predetermined zone. After waiting for a bit, the share’s value indeed subsequently increases to £1.30, which means you’ve made a profit of six points, or £6.
However, if the share falls in price, for example to £1.14, you may decide to sell in order to cut your losses. In that instance, the price has dropped 10 points from the original buy price, so you will have lost £10.
You can also use leverage, which enables you to take up larger positions by committing only a small percentage of the capital required. However, it’s important to remember that using leverage means you could also stand to lose much more than your initial stake because if the price falls, that number of points is multiplied by your deposit to calculate your loss. Always trade respon
