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What is Spread Betting & How Does it Work?

What is Spread Betting & How Does it Work?

What is Spread Betting & How Does it Work?

Opening a Spread Betting Account can allow you to quickly profit from the trading of shares whether they move upwards or downwards. At the opposite end to investing, Spread Betting is designed for short-term plays.

What is Spread Betting?

Unlike when you buy and sell shares through an Online Platform, you will be betting on the price of a share to rise or fall. This is usually done on a £ (such as £10) per point basis.

You won’t physically own the share that you are betting against. However, you will be able to go long (buy) if you think the price of a share will rise and go short (sell) if you think the price of a share will fall.

If you call it right and the share moves in the direction you speculated it to, you stand to profit.

Think of it as gambling on a football match, but you are more in control of the odds and can do more homework on the potential result.

It also comes with a number of benefits including tax-free profits as well as no separate commission charges.

Spread betting firms will allow you to bet on the movement of many financial instruments, but we will be focusing on shares.

Getting to Grips with the Concept of Spreads & Margin

As highlighted, Spread Betting works by placing a bet on a per-point movement of a share (either positive or negative, with an amount of £ per point.

This is known as the stake size of your spread bet. The ‘spread’ is referring to the difference between the buy and sell price.

Spread Betting also uses ‘leverage’ or ‘margin’ – this is why your losses or gains can be much larger than your initial outlay.

A Real Example of Spread Betting

Imagine you’ve been researching a stock that you felt was undervalued in the marketplace. The company’s full-year results are due and you expect the financials to surpass all expectations.

You expect the share price to rise upon its results day and place a buy spread bet on the share at a rate of £10 per point.

Presume the share was trading at 199/200 – the spread would be 1 (the difference between the sell and buy price respectively).

A Winning Scenario

The company announces its results and its share sees an unrealistic and hypothetical surge of 50%. The sell / buy price of the share is 300/301 respectively.

Your stake of £10 per point means that you have made a profit of £1,000. This is because the original buy price was 200 and you are now selling your position or closing it at 300. That’s a 100-point increase on a stake of £10 per point.

A Losing Scenario – Unlike Betting on a Football Match, You Can Lose Much More

So the above shows a winning example and a very handsome return of £1,000 on a very small outlay. Let’s say your buy spread bet turned out to be misjudged.

The results of the company were not only bad but revealed a surge in debt and other warning signs that spooked the markets.

The sell / buy price of the share has now slumped to 149/150. At the time you placed your spread bet, the buy price was 200.

That means you are now facing a £10 loss on 51 points (200-149). This equates to a loss of £510 from your original stake of £10.

Keeping your Finger on the Pulse

Spread betting has its obvious advantages, but it’s far riskier than traditional investing.

To lessen the risk it’s important you remain alert; alert to analyst views, alert to macro and industry trends, and have a trading strategy in place (rationale for trades you make, losses and profits you are willing to make).

The worst thing you can do is place a spread bet purely based on a hunch you have – you may experience the odd success in the short term (as it’s a 50:50 chance), but it will not be sustainable.

Moving to Open a Spread Betting Account

This is a simple process. Many of the best spread betting platforms UK have demo accounts that you can open before you move to a live account – you will need to add funds if you opt for a live account.

You should equip yourself for success by ensuring your research and trading strategy are prepared. What sources will you be checking, when are the key announcements, and importantly what share(s) will you be putting a stake on? These are the types of things to consider.

Place a buy if you think the price of a share will rise, and place a sell if you think it will fall. Alongside entering the size of your position and entering a stop-loss and take-profit instruction, you should be good to go.

Then it’s a case of calmly seeing how your trade performs – seeking to follow your trading plan and close the position as appropriate (i.e. don’t be too greedy and don’t let losses run away from you).

Great Risk, Great Reward

Spread betting is not for the faint-hearted, it follows the age-old concept of the greater the risk, the greater the reward.

The importance of doing your homework and having a clear strategy in place is absolutely essential!

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I’m Will! I recently left my job working for one of the UK’s leading financial companies in London to start Sterling Savvy, a place to empower people in the UK financially.

With my experience working with some of the biggest financial services companies in the world and my education in Economics & Finance, I want to help you be more savvy with your money.

You can read more about my mission here.

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