Normally when you buy shares you hope to make money through a rise in the share price, and you know that if the price of shares that you own falls you will lose money. This means that in bearish markets it is very difficult to make money because not many shares are going up.
Before spread betting came along, the traditional way round this was to "go short" - to sell shares that you don't actually own, then, when their price has fallen, buy them in the market, and pocket the difference.
Example
You sell 1,000 shares at £1 (receipts: £1,000) and later buy them at £0.75 (cost: £750) = profit of £250.
Click here for an example of shorting.
The trouble with this technique is that it is difficult and expensive for individual investors. That's where spread betting is so useful.
Spread betting allows you to make money in falling markets without actually buying or selling shares at all - you just make a down bet on an individual share or on an index.
The BT example on page 3 was an example of this. You placed a £10 sell bet when the spread was 727p - 733p. The spread fell to 715p - 721p and you closed out by placing a £10 'buy' bet at 721p. Your profit was 727 - 721 x £10 = £60.
Spread betting is an ideal vehicle for shorting stock over short periods of time and thus making a profit in falling and volatile markets.
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