What is Financial Spread Betting?
Financial Spread trading (also known as spread betting) allows you to speculate on the outcome of almost any financial market, over a set period of time. Spread bets can be used to speculate on price movements irrespective of whether the markets are rising or falling. This means that spread betters are able to ‘go long’ (buy) or ‘short’ (sell) on market prices.
Similar to futures markets, spread trading takes place through a financial bookmaker who assumes the other side of the transaction. It is an ideal mechanism for traders with limited initial trading capital. Financial bookmakers exist to make money by taking your money. Over time the average punter will lose many more times than they win. Like the futures markets I estimate that over 90% of clients lose over the long term.
By visiting this website you have identified yourself as better than the ‘average punter’. Through the methodology described in this guido, you can dramatically increase your odds of becoming part of the successful 10% of spread traders.
What is Financial Spread Betting
Trading With a Financial Bookmaker
Trading with a financial bookmaker is similar to trading within any market. There is a BUY price and a SELL price (the spread). Traders simply have to decide their outlook for a particular market and then seek a quote from the licensed bookmaker.
A ‘spread’ is quoted, such as 5000 – 5010 for the level of the German DAX index. If you decide that the index will rise you can place an up-bet, or you may decide to gamble it will fall below 5000. The trader can then selects the trade size (ranging from a few cents with some bookmakers to thousands of dollars per point).
For every point that the investor is right, or wrong, in their prediction they win (or lose) a multiple of the initial stake. For example, if you believe that the DAX index was heading for a rally, you could either place a rolling bet on the daily movement of the index or take a longerterm view by betting on its likely level in a few weeks or months.
Using the previous example you may decide to bet the index price will rise and wager $1 per point. This means that every point above the higher number in the quoted spread (5010) will earn you $1 and every point below it will lose you $1. So if the index quote rises to 5200 –5210 and you decide to close you bet you will make $190 (i.e. 5010 minus 5200 multiplied by your $1 spread bet).
Conversely, if the index quote drops to 4800 –4810 and you decide to close your bet before losing more money you would lose $210 (i.e. 5010 minus 4800 multiplied by your $1 spread bet).
You will always buy at the higher quote and sell at the lower quote. The spread between the two quotes represents the financial bookmakers’ opportunity for profit or spread.
Financial spread trading offers leverage similar to the futures market but with the added advantage of offering traders the opportunity to decide exactly the size of the bet without being limited by fixed contract size.
Financial Spread Betting in Practice
Financial spread betting (or spread trading) is a speculation on the movement of prices on the world’s stock markets and currency exchanges.
This could be a market like the Dow Jones Industrial Average (DJIA) or the FTSE 100, an exchange rate between 2 currencies such as the Euro and the Swiss Franc, or an individual stock on an exchange such as Microsoft on the Nasdaq or BP on the London Stock Exchange.
With spread betting you are trading on the markets without ever having to take ownership of shares or currencies. You’re literally betting on the movement of the price. This means that you don’t need to have huge amounts of capital to start spread betting.
So how does spread betting work?
For this we’re going to use an example.
Imagine that you think the share price of Apple Inc (creator of the iPod) is going to go up over the coming trading session.
At the time of writing the share price on the Nasdaq was $102.50 but you think that it’s likely to go up to over $110.
Based on your thinking you would place a ‘buy order’ at the current price ($102.50) with your trading company for a specified amount per point.
If your trading platform uses whole dollars as points ($1 = 1 point) then for each point that Apple Inc goes up you will win whatever amount you traded per point.
Imagine that you traded with $10 per point. For each dollar up that Apple Inc moves you’re $10 better off. So if the price does reach $110 then you’re $85 dollars in profit.
But there’s a catch (and it’s a pretty big one)
If the price moves in the opposite direction to where you think it will then you will lose by the amount of points it moves times the amount per point you traded.
Thus, if Apple Inc slides to $92.50 then you will have lost 10 points at ten dollars per point amounting to a loss of $100.
So, as you can see, spread betting is an exciting way of trading and making money from the world’s financial markets.
But you also need to be aware that it’s possible to lose quite a bit of money if you don’t trade wisely.