Spread Betting 101
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What is spread betting??
Spread betting is a popular and versatile financial trading method that allows investors to speculate on the price movements of various assets, such as stocks, currencies, indices, and commodities.?
Unlike traditional trading, where you buy or sell the underlying asset, spread betting enables you to bet on whether the market price will rise (go long) or fall (go short) without owning the asset itself.?
Spread Betting is a bit of a sport. Here, you're betting on the direction of price movements of a financial market, not buying or selling the asset. You're speculating on whether the market will rise or fall.
Terminology you must know?
In spread betting, the two essential terms you'll encounter are the "bid" and "ask" prices.?
The bid price represents the lower value at which you can sell a financial instrument, while the ask price represents the higher value at which you can buy the same instrument.
The "spread" is the difference between the bid and ask prices. When placing a spread bet, you'll have to decide whether the asset's price will be above or below the spread by the time you close your position.
Going Long (Buying):
Assume you want to spread bet on a stock, and the current bid-ask price is ￡1500 / ￡1505.?
You believe the stock's price will rise, so you decide to go long and place a bet at ￡10 per point.
In this example let’s assume that a point is equal to ￡1.
Scenario 1: The stock's price increases, and you decide to close your position when the new bid-ask price is ￡1540 / ￡1545.
Calculation:
Profit = (Price difference in points) × Bet Size
Profit = (1540 - 1505) × ￡10
Profit = 35 × ￡10
Profit = ￡350
Scenario 2: However, if the stock's price falls, and you close your position when the new bid-ask price is ￡1475 / ￡1480.
Calculation:
Loss = (Price difference in points) × Bet Size
Loss = (1475 - 1505) × ￡10
Loss = -30 × ￡10
Loss = -￡300
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Going Short (Selling):
Now, let's consider going short on the same stock with a bet size of ￡10 per point. You believe the stock's price will decline, so you sell at the bid price of 1500.
Scenario 1: The stock's price decreases, and you decide to close your position when the new bid-ask price is 1450 - 1455.
Calculation:
Profit = (Price difference in points) × Bet Size
Profit = (1500 - 1450) × ￡10
Profit = 50 × ￡10
Profit = ￡500
Scenario 2: If, however, the stock's price rises, and you close your position when the new bid-ask price is 1550 - 1555.
Calculation:
Loss = (Price difference in points) × Bet Size
Loss = (1500 - 1550) × ￡10
Loss = -50 × ￡10
Loss = -￡500
Where it gets confusing
The confusing word here is “spread".
Perhaps you immediately think about bid/ask distance when you look at the terminal.
Well, here it's not the case: In this instance “spread” is the distance between the price of an asset when you make a bet and the price at closing.
Indeed the closure of the bet will be done at "bid" if you wanted to bet on the market rise (and therefore you entered into this bet at an "ask") or at "ask" if you bet on the market fall, while entering into the bet at a "bid".
So technically it’s the difference between bid and ask, but just in a very different nature.
In conclusion?
Spread betting is an intriguing financial strategy, allowing investors to speculate on market trends without owning the asset. As you execute this strategy, remember that knowledge, a clear understanding of the market dynamics, and sound risk management are your keys to success.