We've looked at what you might call the 'mechanics' of spread betting. Now it's time to consider the dynamics.
The first thing to note is that although spreads are not the same as the share or index or event which they relate to, they do move in line with the movement of the underlying product.
That's an obvious point to make, but it's important because it means that the techniques which an investor would use to predict ordinary share prices are also relevant to an investor who is placing spread bets.
So financial spread betters get involved in:
and the point of all this analysis (as with shares) is to work out whether the quote offered by the indexation company represents good or bad value.
However, there is a crucial difference between someone who buys 1,000 shares of Vodafone as a long term investment and someone who places a buy bet on a Vodafone spread, and the difference is one of timing.
Most spread bets last only a matter of days or weeks. The longer ones last for a few months. It may be okay for share investors to ignore short term fluctuations, but as a spread better your profits and losses depend on correctly predicting daily and weekly moves. You have to think short term, and to make money your short term thinking has to be good.
In the Vodafone example, a share investor doesn't mind if the share price falls 10% in the first week he owns it, as long as it appreciates in the medium to long term. But if you've placed a buy bet on a Vodafone spread that expires in 7 days, that first week fall is very bad news. The fact that the stock recovers the following week is no solace at all. By that time you've lost your money.
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