Financial spread betting is similar to CFD trading. So why spread bet and what’s the advantage? The main difference is that you can bet on anticipated price movements in 100s of financial markets including FX, indices, shares, commodities and more, in any direction. It is a derivative product which means that you are betting on the future movement of an underlying instrument, for example, a UK equity, without having to physically purchase the stock.
Spread betting lets you place a bet of any value against market movement in any direction, measured in £s per point, for example, US30 17000-17001 = I point = £1. You can bet on a multiple (or a fraction) of £1s per point e.g. 10p, £1.50, £2, £5 or £10 but bear in mind that this will have a significant impact on any losses, as well as profits.
As with FX, the value of each underlying instrument is quoted as a bid/offer spread (the difference in the price at which you can buy or sell the instrument). So, if you believe that the underlying instrument is going to rise in value you would place a BUY bet, if you think it is going to fall you would place a SELL bet.
To close a spread bet you place the opposite bet in the same instrument at the same value per point. (For a BUY bet you sell at the current price and for a SELL bet you buy at the current quoted price).
Your profit (or loss) is the difference – spread – between the opening bet and closing bet, multiplied by the value per point of your bet. This is the reason why spread bet can be a choice for traders that what to extent their activity to other adjacent markets.
Why spread bet – example
Following recent news about UK unemployment levels you expect some strengthening of the UK economy. XYZ Index is trading at 6201-6202. You expect it to rise so buy a spread bet at £5 per point. For every point XYZ Index rises you make £5; for each point it falls you lose £5. You BUY at 6202.
Later in the day XYZ Index is trading at 6241-6242. You close your position at 6241, making a profit of 39 points*5 = £195.
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