Guide to Financial Spread Betting - Learn to Trade

The medium of spread betting works entirely differently from most other trading styles, and has a number of innovative and unique quirks that set it apart from more conventional instruments, this guide is design to help you to get your head around spread betting. Financial spread betting is not so much an investment as a speculation, calling a particular direction in the movement of a market to profit directly from the broker.

spread betting guide

When a trader invests in the stock market, he buys shares in one or a number of listed companies, having reasoned that external market factors combined with business strategy are likely to lead to an increase in value over time. This increase in value, combined with an ongoing dividend to reflect the trader’s share of the company’s ownership is where the money in stocks and shares is to be made, and the security of a tangible, valuable asset in the form of a share is sufficient to slim down the risk profile.

Spread betting, on the other hand, operates on an entirely different principle. While to think of spread betting as gambling isn't always helpful, it is perhaps a valuable lens through which to analyse the theoretical structure of what spread betting is and how it works. With spread betting, the transaction being entered into when you trade on a company’s shares is not a share transaction. There is no transaction per se, and no change of ownership of any tangible asset – simply an agreement between trader and broker to enter into a wager on set terms, based on the outcome of some underlying market.

Examples of Spread Bets

Winning Trade
  1. The FTSE 250 market is quoted as follows: 9600-9602
  2. You can either buy at 9602 (the offer price) or sell at 9600 (the bid price)
  3. You think the price will go higher than 9602 and you bet £2 per point
  4. Your expectation is right and you decide to sell at 9642
  5. You will then pocket £80 (40 * £2 per point)
Losing Trade
  1. The FTSE 250 market is quoted as follows: 9600-9602
  2. You can either buy at 9602 (the offer price) or sell at 9600 (the bid price)
  3. You think the price will go lower than 9600 and you bet £2 per point
  4. Your expectation is wrong and you decide to buy at 9620
  5. You will then loose 9620-9600 = -20 * £2 per point = loss of £40

As such, spread betting can be equally deployed as a mechanism for speculating on sports, political outcomes, TV or just about anything that can be measured – for the operation of the model, there is no need for anything financial or economic, nor even for anything predictable or controllable. Financial spread betting is a popular sub-niche of the wider spread betting industry because the markets can be studied and reasoned logically, and while this isn’t a pre-requisite for successful trading, it is the condition that sets financial spread trading aside as more akin to a trading (as opposed to gambling) activity.

Spread Betting Guide

The wager is thus: the trader will ‘buy’ or ‘sell’ a market depending on whether he thinks the market will move up or down, on the understanding that the broker will pay out on successful calls and will be paid to an equal extent on failed positions, to varying extents depending on how heavily the market moves over the lifetime of the trade. This taps in to an important, often fatal element of human psychology – the temptation to weather rough times in the hope of a future improvement. With spread betting, both profits and losses are uncapped, meaning traders will have to decide when best to accept either a profit or a loss.

Bets are offered on a variety of markets and indices, which are used merely as a raw numerical basis for the wager. If the market rises beyond the price at which the trader ‘bought’ the position, the trader wins – end of story. It is this simplicity in part which makes spread betting such an attractive trading opportunity.

Markets are quoted by the broker on the basis of spreads, which indicate the range through which the underlying market or index might be expected to move over the course of the day. All things being equal, spreads would be centred around the current market price with a point in either direction built in to account for the broker’s commission. However, with dynamic quoting which changes spreads as markets unfold and built in weighting to reflect the probability of outcomes, it can often be quite difficult for traders to call the market correctly, and to squeeze a sufficient profit from their trading.