Spread betting

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13. Dynamics - the size of the spread

It is vital that you understand the significance of the size of a spread. With any given spread:

• you buy at the higher price
• you sell at the lower price

This means that:

• with a buy bet, you only make money when the spread has risen far enough for the sell price to be higher than the price at which you bought.
• with a sell bet you only make money when the spread has fallen far enough for the buy price to be higher than the price at which you sold.

Clearly, the wider the spread, the more difficult it is to make money. If you don't understand this key point, don't get involved in spread betting.

One of the reasons the FTSE 100 index is so popular with spread betters is that the spread is fairly narrow. By contrast an individual share with a spread of 120 - 150 is a tough nut to crack. If you buy at 150, and the spread moves to 140-170, it looks like there's been a healthy upward move, but you're still not in profit because the sell figure - 140p - is below your buy figure of 150p.

You'll sometimes hear it argued that you should only bet mainstream markets because they have the narrowest spreads, but this is slightly misleading.

• Firstly, you should stick to the market you know most about - not necessarily the mainstream markets.
• Secondly, some of the narrowest spreads are found on obscure markets. The width of the spread depends more on the volatility of the market than it does on being mainstream.
• Thirdly, volatility is what enables good spread betters to make good profit. If you are playing non-volatile, long term markets with gentle rises and falls then you are more often than not better investing in the underlying markets (equities) than in spread betting.

Despite all that, the fact remains that if you bet a market with a wide spread, you have to bridge that gap before you can make a profit, so bear the width of the spread in mind.

1. What is spread betting? 2. A brief history 3. Spreads on individual equities 4. Spreads on an index 5. Performance spreads 6. Other financial spreads 7. Practical advantages - leverage 8. Practical advantages - going short 9. Practical advantages - hedging 10. Practical advantages - volatile markets 11. Practical advantages - tax 12. Dynamics - think short term 13. Dynamics - the size of the spread 14. Dynamics - upside and downside 15. Dynamics - length of bet 16. Strategy - bet only what you can afford 17. Strategy - cutting losses 18. Strategy - stop losses and limited risk bets 19. Strategy - taking profits 20. Strategy - arbitrage 21. Opening an account 22. Placing a bet and managing your account 23. Regulation 24. Some more tips 25. Conclusion

• The Investors Guide to Financial Spread Betting