Spread betting

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5. Performance spreads

It's easy for indexation companies to create spreads on share prices and indexes because they operate on a numerical scale which everyone understands. The result of the bet is unambiguous: it is based on the price reached by the share.

But there are some situations which people would like to bet on, but which do not represent results on a numerical scale.

Take, for instance, the London Stock Exchange's merger negotiations in 2000 with various other exchanges. There was lots of speculation about who the LSE would eventually end up with, and people wanted to bet on it. So indexation companies created an artificial point system to represent the possible outcomes.

Under this system whichever company was successful in merging with or taking over the LSE got 50 points. If there were two partners, they each got 25 points. Failed bidders got no points.

Having established the point system, the indexation company then offered its spreads on the bidders:

• 10-12 points for Deutsche Borse
• 12-14 points for Euronext
• 12-14 points for Nasdaq
• 7-9 points for OM Gruppen
• 4-6 points for the Field

If you made a £20 bet on Nasdaq, and Nasdaq took over the LSE, you would collect 37 (50 - 13) x 20 = £740

If the Nasdaq and Deutsche Borse both took over the LSE, you'd collect 12 (25 - 13) x 20 = £240

If neither the Nasdaq or the Deutsche Borse took over the LSE, you would lose 50 (50 - 0) x 20 (your stake) = £1000

These are "performance spreads". They are simple numerical scales against which performances can be judged. The standard allocation for such scales is: 25 points for a win, 10 points for finishing second, and 5 points for finishing third. But these denominations can and do change.

They work as well in sports and general spread betting as they do in financial spread betting.

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