Financial spread betting is similar to a two horse race, you have a 50/50 chance of success, either you are right with your prediction or wrong, it’s that simple!
Financial spread betting does, however, give you the opportunity to multiply your stake many times if you are correct. Be aware that with an incorrect bet there is the possibility of losing many times your stake, unless you place stop loss orders at the time of making the bet.
Financial spread betting is based on a very simple concept. If you think a market, e.g. FT 100 Index, will rise then you place a buy order, if you think it will fall you place a sell order.
The spread betting firm will make a quotation of say 5000- 5003 points for the FT 100 (financial markets quote in either points or currencies) This means you can buy for 5000 points or sell for 5003. The difference in the points offered is the ‘spread’ that the company makes its profit from.
Incidentally it is worth making the point that spread betting companies, unlike conventional bookmakers do not mind how much you win, because they match the opposing bets and any unmatched bets are covered by the company in the actual market itself. The betting company makes its profit from the ‘spread’ so the more bets placed, win or lose, the greater the profit, so there is no chance of having your account closed as can happen with conventional bookmakers if you consistently win.
Example of a winning bet. If you think that the FTSE 100, known as the Footsie, will rise then you can get a price from the company’s website, say 5000-5003 points. You ‘buy’ 5000 at say £2 per point movement and (hopefully) watch the Footsie rise,.
Should you decide that a rise of about 30 points to is far enough and there is a chance that the Footsie might reverse you ‘sell’ the bet to close the transaction. The quotation you get might be 5030 – 5033, then you realise a point’s profit of 5030-5000 = 30 points x £2 = £60.
Example of a losing bet. So you were unlucky with the bet and the Footsie did not oblige this time and you got it badly wrong. Suppose the bet was placed on the same quote of 5000-5003 @ £2 per point, but the terrorist bombers struck and the Footsie crashed 100 points to 4900. The new quote is 4900-4903 your loss on the bet is then 5003-4903 = 100 points x £2 = £200.
However, you had heeded the warning and taken the precaution of placing a stop loss at 4990 limiting your losses to 13 points x £2 = £26.
Note: In rare events where a market crashes it may not be possible for the spread betting company to operate the stop loss at exactly the point set, hence incurring a greater than anticipated loss. To have total insurance against these rare events it is possible to buy a ‘guaranteed stop loss’ for a small premium. The company then guarantees to limit your losses to the agreed amount.
There is a very large range of markets available to bet on covering the financial indices, FT100, Wall St, etc. Currency trading, gold, oil and a limited number of major companies. Remember, there is no tax to pay with spread betting under current legislation. If you are shrewd enough to make big money then it does not have to be declared to the Revenue, but it would be prudent to keep a record in case they ask!
There are a few formalities to go through when opening an account, relating to the money laundering laws, so be patient as they have to comply. You will need to deposit money before you can play, and naturally the amount deposited will govern the size of bet you can place, relative to the stop loss position. The required deposit amount varies between the companies.
Some of the companies offer a free play site where you can familiarize yourself with the markets and make a few mistakes for free!