DIY Investor Magazine
/
March 2016
40
SPREAD BETTING 101
Financial spread betting allows you to benefit from the
movement in the price of shares, commodities and a
number of other financial indices and markets, without
actually purchasing the individual investment itself.
The ‘spread’ referenced is the difference between
the price the spread betting company will pay for
a stock and the price it will sell it for; the sector is
highly competitive with companies competing to woo
customers with the most attractive (‘tightest’) spreads
on shares - the spread is measured in points or ‘pips’.
Spreads are regularly updated relative to the shares’
actual stock market valuation and any profit, or loss,
is based upon the difference between the new spread
prices and the price you invested at.
A key feature of spread betting is that you can go ‘short’
on a stock or index – i.e. bet that its value will go down
allowing someone who has invested in a particular
stock in a traditional way to use a spread bet as an
insurance or hedge; if the share price falls, the value of
the equity holding declines, but the short spread bet
pays out, and the greater the fall, the greater the return.
In order to begin trading you will need to open an
account with a spread betting company which will
require you to deposit a sum of money or open a line of
credit with which you can trade.
There are a range of different accounts available, some
with minimum initial deposits, aimed at different types
of investor. Many companies will offer incentives for you
to open an account with them, such as matching your
initial deposit, or offering bonuses for frequent traders;
your choice of provider could be influenced by the
size of the initial sum you want to invest, the incentives
offered by a company, and how competitive their
spreads are.
Generally it is better to have narrower spreads because
even small movements in a share price may present the
opportunity to sell, or buy back, shares at a profit.
SPREAD BETTING IN ACTION
When spread betting you are gambling on the
movement of the price, up or down, of a share, or
index, and your profit depends upon the degree to
which you are right – the more the price moves in
the direction you predict, the bigger your profit; the
converse is also true.
If you believe that the value of a share will
rise compared to that quoted by the spread betting
company, you ‘buy’ that stock; when spread betting,
you never take physical ownership of the share, as
a ‘derivative’ your profit or loss depends upon, or is
derived from, the performance of something else.
You invest a stake per point of movement (‘pip’) in the
price of that stock.
The price at which you buy a stock is the higher price
that is quoted in the spread, so you cannot sell your
stake back, and thereby make a profit, until the sell
price moves above the price you bought at.
Your profit is the number of pips the spread’s sell price
moves above its buy price multiplied by the amount you
bet per pip – perhaps £1.
If you believe that the value of a share will fall, you ‘sell’
that stock, in the hope that you can buy it back later for
less.
The process is as above, but in reverse - once the ‘buy’
price falls below the price you sold at, you can buy the
shares back for less and your reward represents the
number of pips below your sale prices multiplied by the
size of your stake per pip.
