Spread betting

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4. Spreads on an index

In earlier examples we looked at spreads on individual shares which are popular bets for investors: most indexation companies offer prices on all the FTSE 250 companies, techMARK 100 companies and AIM listed companies, as well as foreign companies on Nasdaq, the Dow Jones, the CAC in France and the Dax in Germany.

But another popular way to bet is on the movement in the price of an index, and the most popular of all is the FTSE 100 index. The principles are the same:

Take for example a spread on the FTSE 100 of 6100 - 6110. You can make a buy bet at 6110 or a sell bet at 6100 on the closing price for the day. Let's say you go with the buy bet, and your stake is £10.

Now assume that the spread offered on the index rises during the day to 6120-6130. You're in profit, and you decide to close your position by making a £10 sell bet at 6120.

Your profit on the two transactions is:

If you had expected the index to fall and your first bet had been a sell bet at 6100, the situation would not have been so good. If you'd bought back at 6130, you would have made a loss:

Note that the profit you made when trading between these two spreads was 10 units, but the loss when you got it the wrong was 20 units. The difference is accounted for by the fact that you always have to buy at the top end of the spread and sell at the bottom end. That's where the indexation company makes its profit.

In general, bets on indexes have fairly narrow spreads. Indexes are also easy to understand and easy to follow. For both these reasons they are a sensible place for the novice spread better to start.

The indexation companies offer spreads on all the major indices including the FTSE100, Dow Jones, Nasdaq, TechMARK and Nikkei. The FTSE100 and the American markets tend to be the best for UK investors.

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