Spread betting

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3. Spreads on individual equities

There are several types of spread bet offered in different subjects by indexation companies, but the vast majority of bets are either 'basic' or 'performance' spreads.

The example of BT shares on page 1 was a basic spread. The indexation company offered a spread of 727p - 733p, and because you thought the shares would rise (and the spread with it) you placed a £10 buy bet at 733p.

But suppose that in the same situation you thought the shares were going to fall. One of the great attractions of spread betting is that you can make money whether you are bullish or bearish about a market. You could, for instance, have placed a £10 "sell" bet at 727p.

If your judgement was right and the shares did fall, the spread might have changed to 715p - 721p. At that point you close out by placing a £10 "buy" bet at 721p.

Taking the sell and buy transactions together, your profit on the transaction looks like this:

Again, you've made a profit by being on the right side of the moving spread. The fact that the underlying security - the share - was falling in price didn't matter, because you bet on a falling spread.

So you don't think it's all plain sailing, consider what would have happened if BT's share price had risen and the spread had changed to 738p - 745p. Remember, your first bet was a "sell" bet at 727p.

In this position, if you had decided to cut your losses and close out by placing a buy bet at 745p, the picture would have been fairly dismal:

You've probably already noticed a couple of other features of spread betting:

1. You can make money whichever way the share price is heading, unlike ordinary share investing.
2. To make profits you've got to cover the spread. When you've placed a buy bet, you're not in profit until the sell price has risen higher than the price you bought at. When you've placed a sell bet, you're not in profit until the buy price has dropped below the price you sold at. The wider the spread, the more difficult it is to make a profit.

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

• Financial Spread Betting
• The Beginner's Guide to Financial Spread Betting