Spread betting works around the terminology of ‘buying’ and ‘selling’, sometimes also referred to as a number of other things, including commonly ‘bid’ and ‘offer’, which can be unhelpful in clarifying the distinctions between spread betting and other trading styles. When you’re buying, you don’t actually acquire anything as such, other than a position with the spread betting company. Likewise, when you’re selling, you’re not actually selling anything, and a sold position can be an asset just as readily as a position you have bought.
You don’t need to have bought a position to sell it either. To best understand the role of buying and selling, disregard this terminology altogether – view ‘buying’ as supporting a market, or ‘going long’, and view ‘selling’ as shorting, or assuming the market will fall before it rises. With spread betting you can buy or sell equally, entirely at your discretion – if your first 100 trades are sell-side, that’s fine. Buying and selling can take place at any time, and you’re effectively just picking the side of the spread that most suits your estimation of market performance.
In fact, there are some notable traders who have made their fortunes from shorting companies – that is, from taking a position that benefits from corporate devaluations. In theoretical terms, with shorting you notionally sell the market at today’s high price, and defer your purchasing until some future point where you believe the market price will be lower, thus profiting from the gap.
The idea of buying and selling can quickly become more confusing than it needs to be, and any confusion is perhaps best justified with a quick example.
Taking Advantage Of Spread Betting Example
The FTSE100 is sitting at 6000. Eyeing up trading opportunities in that market, you check the spread on offer from your broker, which is sitting at 5999-6001.
The buy price of the market is 6001. If you assume the market will rise, buying at 6001 gives you the right to payment from the broker if the market rises beyond 6001, which becomes your break-even point for the transaction.
Likewise, if you assume the market will fall and decide to sell at 5999, your break-even point becomes 5999 with every further point the market declines representing a profit increment. Positions that are opened must be closed to bank a profit or accept a loss, and this process is carried out by reversing your original action. So, for positions you buy, these are ultimately sold to cancel out the trade and bank/pay the difference, and vice versa.
Every point that moves in your favour (and indeed, every point that moves against your position) represents an additional multiple of your stake. So, if your stake is £1 per point and the market moves up beyond your 6001 buy price to a closing price of 6010, your return will be £9 – that’s (6010-6001) x £1.
Similarly on the sell side if the market moves beyond your sell price of 5999 to 5990, your return will be the same – £9. If the market finishes anywhere between the spread, you lose – the difference represents the commission paid to the broker, and is a discreet charge on the transaction (as opposed to charging a percentage). As the trading cost is fixed, this can work out to be much less of a costs when you’re spreading the impact of a 2 point spread over 50 points for example than were it a percentage charge.
Because profits and losses are uncapped, it is important that you are familiar with the concepts of buying and selling in order to have the best command over your account. Bought positions need to be sold before any profit is realised, and allowing profitable positions to roll overnight isn’t always an advisable strategy. Similarly, a profitable position that is left open too long will almost inevitably reverse and either cost you money or erode your earnings, while losing positions will almost inevitably continue to gather steam against your trading account, and ultimately your bank balance. And with unlimited personal liability, you could easily be pursued through the courts to meet any losses you incur, so it pays to be sensible at all times and to make sure you have a firm foundation in how spread betting positions are crystallised.