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Trading News How does spread betting work? An introduction
Trading News How does spread betting work? An introduction
How does spread betting work? An introduction |
| Written by Trader Hideout Editor | |||
| Thursday, 04 December 2008 16:07 | |||
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Spread betting can sometimes be difficult for people to grasp, however, a simple example is usually the best way to explain it. Many people use the FTSE 100 for spread betting or spread trading, so we will use this as an example. To begin with, you would contact a spread betting firm to ask for its ‘spread’ on the FTSE 100. You can usually do this via telephone or on the company’s website. Let’s say that they give a spread of 4000 – 4200. Which way you bet or choose to trade will depend upon how you feel the FTSE will move. So if you think the FTSE will increase, then you place a ‘buy’ or ‘up’ bet. You opt to ‘buy’ at, say £10 per point at 4200. This means that for every point over 4200 that the FTSE 100 goes, you earn £10. Therefore, if the FTSE closed at 4390, that is 190 points over so you earn a profit of £1900. If, however, you are wrong and the FTSE falls to 4050, you would lose £1500 (150 points below the 4200 level at £10 per point). If you thought the FTSE would fall, then you place the opposite bet, i.e. a ‘down’ or ‘sell’ bet. For the same example, you bet £10 per point at 4000. If the FTSE falls to 3900, then you make a profit of £1000 (£10 x 100 points), but if the FTSE rises to 4100 then you lose £1000 (£10 x 100 points over). From this simple example, it is easy to see that spread betting offers a simply way for people to bet on how the markets move. Previously, if someone thought the financial markets were falling, they would have to invest in hedge funds or sell shares ‘short’ to profit, so financial spread betting is a way to solve this problem.
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