Financial Spread Betting
Financial Spread Betting is a rapidly growing area of investment that does not require the parties involved to exchange, or even own, the assets they are speculating on.
Spread betting is generally easiest to think of as a bet on the value of an asset, such as stocks and shares, to either increase or decrease at some specified point in the future.
A bet on the value to increase is usually called a 'Buy' bet or a 'Long' position, whereas a bet on the value to decrease is a 'Sell' bet or 'Short'.
The profitability of such a bet is then determined by the accuracy of the bet made by the trader and the stake based on a 'per point' system.
If an investor risked £2 per point and the market was to move by 14 points then there would be a profit of £28 made if the trader was correct and a loss of £28 if they were not.
Different markets have corresponding definitions of what 'a point' constitutes. For example with FinancialSpreads.com or <a onClick="javascript:pageTracker._trackPageview('/outgoing/article_exit_link');" href="http://www.spreadbets.org.uk/tradefair_account.php">Tradefair</a>, when trading stock market indices 'a point' is normally a point of the index value, eg the FTSE is currently valued at around 5100 points. On the other hand, when trading stocks / shares in the UK, 'a point' is 1p of the share price. With Crude Oil 'a point' is $0.01 or one cent.
Thinking about a slightly more detailed example can make the spread betting system clearer:
Trading Example
If you decide to spread bet on an index such as the FTSE 100 then you might see a spread of 5100 - 5101.
If you were to buy this index at 5101, ie bet on the FTSE 100 to go up, and the market moved to 5120 - 5121 then you could close your bet at 5120.
If you were trading with a stake of £3 per point then your profit = (5120 ' 5101) x stake per point = 19 points x £3 per point = £57.
On the other hand, if the market had moved down to, for example, 5085 ' 5086 and your trade was closed at 5085 then, again trading £3 per point, your loss = (5085 - 5101) x stake per point = -16 points x £3 per point = -£48.
Key Spread Betting Points
There are a number of advantages to <a onClick="javascript:pageTracker._trackPageview('/outgoing/article_exit_link');" href="http://www.financialspreads.com/">financial spread betting</a> over traditional stock trading:
1) The fact that no assets are exchanged means that spread betting is not tax liable*
2) There are a wide range of markets on offer such as shares, indices, forex and commodities
3) An investor can buy or sell a market depending on how they feel the market will move, ie an investor can spread bet on a market to move up or down
*According to current UK tax law, if you pay tax in another jurisdiction this may vary
Note that spread betting carries a high level of risk and may not be suitable for all classes of investor. Only trade with money that you can afford to lose. Make sure you fully understand the risks involved. If necessary, seek independent financial advice.
