A couple of financial spread bet examples will help you clearly understand just how spread betting works. Although there are many different types of financial spread bets – daily bets, rolling daily bets, futures spread bets – they all work essentially the same as far as profit or loss.
If the price of the security that you’re making a spread bet on moves in your favour beyond the spread price at which you entered the market, then your bet will be profitable.
However, there is also the risk that the market price may move in the opposite direction, against your bet, resulting in a loss. You can control your level of risk in a spread bet with a stop-loss order which will close out your spread bet trade if the market moves a specified distance against you.
Since one of the advantages of spread betting is that you can just as easily sell short – anticipating a decline in price – as you can buy long – looking for price to rise, we’ll look at examples of both a long/buy spread bet trade and a short/sell spread bet trade.
Margin and Stake
There are two considerations you have to take into account with each spread bet you make. First, there is the margin requirement. Spread betting is a leveraged investment, which means you do not have to put up the entire value of the underlying security that you’re betting on in order to place a trade.
Rather, you only need enough trading capital to put down a margin deposit to place a spread bet, which may be as little as 5% of the total value of the underlying security. For example, if you wanted to place a spread bet on Vodafone Group Plc stock on the London exchange, and the share price was £150, you could place a spread bet with a margin deposit of a little less than £8.
You also have to decide the amount of your stake on your spread bet. The amount of your stake will determine how much margin is required for your spread bet. Your profit or loss on a spread bet trade will also be multiplied by your stake amount.
A Spread Bet Example – Buy Trade
Let’s look at an example of how a buy spread bet on Vodafone stock would work. If the current share price of Vodafone on the London exchange is £150, then the spread might be £150-£152. If you placed a buy spread bet, then you would buy at the asking price of £152. In order for your spread bet to profitable, the bid price – the lower price in the spread – must rise above £152.
If the stock price does rise, for every point it advances above £152, your spread bet will be profitable. Let’s assume the stock price rises so that the spread quoted by your spread betting provider becomes £157-£159. At that point, your spread bet is profitable by five points – the difference between the current bid price of £157 and your initial buy in price of £152.
Again, the five points is multiplied by the amount of your stake. Assuming your stake was £5, you would have a £25 profit if you chose to close out your trade at that time.
Conversely, if the price of the stock had declined so that the spread being quoted was £147-£149, then your spread bet would be showing a £25 loss – the difference between your buy in price of £152 and the current bid price of £147. Your stake size determines the amount of your exposure to potential loss.
A Spread Bet Example – Selling Short Trade
If you believe the price of a security that you want to spread bet is going to fall, then you would want to place a spread bet selling short in order to profit from a decline in price.
For our short sell example, let’s consider a spread bet on a forex market session. Assume that the forex currency pair GBP/USD is trading at 1.3000, and that your spread betting firm is quoting a spread of 1.3000-1.3002. Placing a spread bet selling short, your sell price would be 1.3000.
For your trade to become profitable, the asking price – the higher price quoted in the spread – must decline to below the 1.3000 level. If price fell so that the spread became 1.2990-1.2992, then you would have a profit of eight points times whatever your stake amount was. If you had placed your bet with a £10 stake amount, then you would have a profit of £80.
If you’re selling short with your spread bet, you do not want the price of the underlying security to rise. If the spread quoted on GBP/USD had risen to 1.3005-1.3007, then you would be showing a loss of seven points times your £10 stake amount – £70. You could, however, have limited your loss to, say, £50 by placing a stop loss order at 1.3005. If you had done so, then as soon as the spread advanced to 1.3003-1.3005, your trade would automatically have been closed out.
Holding Positions Overnight
If you decide to hold your spread bet overnight, into the next trading day’s market session, your spread betting provider will charge you a small financing charge. The financing charge will either reduce your profit or amplify your loss by that small amount. This does not apply to futures spread bets, which already have financing charges figured into the spread.
There are three primary facts to keep in mind when spread betting:
1 – The margin requirement for your spread bet depends on –
- The price of the underlying security
- The amount of your stake
- The margin percentage required for spread betting the specific security
2 – In order for your spread bet to be profitable, the price must move enough to overcome the spread. You buy at the higher spread price, the ask price, but sell at the lower spread price, the bid price.
3 – The amount of your profit or loss on your spread bet will be your stake amount times how many points the price has moved in your favour or against your position.
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CHAPTER QUICK LINKS
- 2.Why Spread Bet
- 3.Who Should Spread Bet?
- 4.How Does Spread Betting Work
- 5.History of Spread Betting
- 6.Markets You Can Spread Bet
- 7.Types of Spread Bet
- 8.Risk Management Tools
- 9.Sports Spread Betting
- 10.Spread Betting Regulation
- 11.How Spread Bets are Priced
- 13.Spread Betting Strategies
- 14.Make a Living
- 15.Spread Bettor Mistakes
- 16.Risks of Spread Betting
- 17.Beginners Recommendations
- 18.Next Steps