A spread bet is a bet on the future movement of an underlying instrument. In short, if you think that it will rise, you place a buy bet (long), if you think that it will fall, you place a sell bet (short). It is very much unlike ordinary shares trading that you benefit from rising as well as falling of shares or other financial instruments.
To understand better how spread betting works, the best way is through an example.
A spread betting company will give you two prices for an underlying instrument; a bid — which is the price you can sell it at — and an offer, just like a normal equity — which is the price where you can buy at — and the difference between them are known as the spread.
The movement of the instrument is measure in points. Letâ€™s say for equities 1 point = 1 pence for indices and usually 1 point = £1 and you can place a bet of any value right against every point movement in the instrument. You could go £1 per point, £10 per point, £20 per point, etc.
How will you know when to close a bet? You can do this simply by placing an opposite bet on on the specific instrument at the same £ per point. In closing a buy bet, you will sell at the current quote and in closing a sell bet you buy at the current quote.
Here is a scenario with an ordinary share spread bet to help you picture it out better:
T-mobile UK rises to 140- 140.5
Investor #1 thinks that T-mobile UK is going to rise and places a bet on 140.5 for £10 for one point.
Investor#2 thinks otherwise, that T-mobile UK will fall and places a sell bet on 140 for £10 a point.
Letâ€™s say hereâ€™s what happens after they placed their bets:
T-mobile UK rises to 145-145.5
Investor#1 prediction is correct since T-mobile UK has risen and he closes his position with a sell at 145 and therefore makes a profit of £45 (4.5 points x £10).
Investor#2 has decided to cut his losses and closes his position at 145 and makes a loss of £50 (5 points x £10).
If T-mobile UK falls, letâ€™s say to 136-136.5 , it is basically the same scenario but this time, Investor#1 loses, close his position with a sell bet of 136 with a loss of £40 (4 points x £10) and since Investor#2 has anticipated this fall, he decides to close his position by placing a buy bet at 136.5 making a profit of £35 (3.5 points x £10).
What determines the rise and fall of shares? Always look out for the latest news and current events because the real world events is what drives market prices.
As what you can see, this is a risky endeavor but it does put a little spice to the usual ordinary shares and like with any other type of investments, always exercise precaution in dealing with your money.
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