Spread Betting Pricing
Spread betting companies take ‘bets’, or more appropriately ‘positions’ in markets with dynamic pricing that responds as the market moves. The following illustration of spread betting pricing explains the basics of how spread betting transactions work.
The FTSE100 opens at 6000. Amidst increasingly positive economic indicators and a number of key announcements pending, you conclude that the FTSE will rise on the day, and want to enter into the spread market for it. At the point where the FTSE100 sits at 6000, your broker may quote pricing at 5999-6001. What does this mean?
The prices given reflect the buy and sell prices of the market. As you are looking for a rise in the FTSE, you want to ‘buy’ the market at 6001. This essentially means you are betting that the market will rise beyond 6001, at which point you can start to earn multiples of your stake.
If you believed the market was likely to fall, you would ‘sell’ at 5999. This means you start earning multiples of your stake when the market falls below 5999. The margin in the middle (in this instance 6001 minus 5999 = 2 points) represents the broker's commission on the trade. This works because the market has to rise an additional couple of points to yield a profit, thus the broker earns a commission on your successful trade before it starts to earn those elusive multiples for you.
Because pricing is dynamic in response to the underlying movements of the market, it pays to be decisive and get in early. If the FTSE in the above example started to rise to 6001, the market would be adjusted accordingly, perhaps to 6000-6002, making it harder for you to squeeze a profit from the market. The sooner you respond, the greater opportunity you will have for making money from the transaction.