Spread-Bet Basics for Your Investment Portfolio - dummies

By David Stevenson

Spread betting is a specific type of gambling in which you win not by picking a winner or loser, per se, but by correctly identifying whether the actual outcome is higher or lower than the stated range (the spread).

Today, spread betting is the biggest and most common form of financial betting. Quite simply, you bet on a financial market with a spread of prices and returns based on the likely direction of that market. For example, suppose that the bid for a stock is £100 and the ask is £103, but you think the stock price will go below £100.

In that case you would wager, say, £2 for every pound below £103 that the stock falls. If the price falls to £97, you win £6; if the price increases to £109, you lose £18. Of course, how you actually place your bets and garner your profits and losses is a bit more complicated.

When you place a spread bet you have three decisions to make:

  • What you want to bet on.

  • The size of the bet.

  • Whether you want to pay for a stop loss.

To place a spread bet, you ring up your broker who gives you two numbers: the bid price (at which you’ll sell) and the offer price (at which you can buy, sometimes called the ask price).

The bid is always the lower of these two numbers and the difference between these two numbers is known as the spread (so no prizes for guessing where the term spread betting comes from!).

Imagine that you’ve bought a share or are trading in a financial index; here’s how you make money using spread betting. The change in the price of the financial asset (the share or index) is measured in points: for shares 1 point = 1 pence and for indices 1 point usually equals £1.

You can place a bet of any value against every point change in the underlying financial asset; say, £1 or £100 per point. To close a buy bet, you sell at the current bid price whereas to close a sell bet you buy at the current offer price. The profit you make is the points difference between the opening bet and the closing bet times the value of your bet per point (that is, £1 or £100).