Spread betting

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1. What is spread betting?

The best way to understand spread betting is to contrast it with traditional betting.

With traditional betting, you stake money on the outcome of an event at fixed odds (e.g. 6:1). If your prediction is correct - the horse wins - you win your stake multiplied by the odds. If your prediction is incorrect, you lose your stake. The odds are fixed in advance, and you're either completely right or completely wrong.

Spread betting is different:

• you don't have to predict the exact result
• the odds are not fixed

You still have to make a prediction, but the key is to get your prediction on the right side of the 'spread' offered by the indexation company.

This is best illustrated by a simple example. Let's say a spread betting company offers a spread of 727p - 733p on the price of BT shares. 727p is the 'sell' price and 733 is the 'buy' price.

Suppose you think the shares are going to rise. You make a £10 "buy" bet at 733p. Over the next few days the price of BT shares does rise, and the spread quoted by the indexation company moves upward to 738p - 745p.

At this point you might choose to "take your profit" and the way you do it is by making a £10 "sell" bet at 738p. Your profit on the two transactions would look like this:

So - what are the key points?

1. You buy at one end of the spread and sell at the other, and if the spread has moved far enough in the right direction between the time you buy and sell, you make money. If it moves in the wrong direction, you lose.
2. The more right you are, the more money you make. The more wrong you are, the more money you lose.
3. The size of your stake determines how much profit you make per unit move.
4. You never actually own the shares, commodity, bond or whatever else it is that is the subject of the bet. Your bet is on the spread, not the underlying instrument.

If you've understood everything so far, you're on your way to becoming a spread better. Now a short diversion back to the origins of 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