Beginner’s Guide to Spread Betting
August 26th 2008 11:01 am
In the past it was only City whizz kids with instant access to real time market information that indulged in spread betting on companies and markets. But like contracts for differences (CFDs), the popularity of spread betting has exploded, particularly with the advent of the internet.
That said, spread betting is a high-risk means of punting on the stock market.
And be warned: the losses are horrendous if you get it badly wrong. With traditional fixed odds betting you might wander into a bookmakers and place a wager and - if your luck is anything like mine - you will lose your stake money.
Spread betting is completely different animal. Win and the upside is potentially unlimited. Get it wrong and you’re not so much left chasing your losses, rather they end up chasing you.
But there is also much to commend it. Buying shares by traditional means is a one-way bet. You are wagering on a share price rise. Spread betting allows you bet against an individual share, or indeed the entire market - as well as buy into its upside.
And it allows you to wager on all manner of markets and events - from the gyrations of the FTSE 100 right through to the outcome of a cricket match.
Enough of the theory, here’s how it works
A spread better such as IG Index will quote you two prices in much the same way as an equity market maker would - giving you a bid and offer price.
One of the favourite bets is a punt on the movement of the Footsie (FTSE 100 Index).
We are offered a spread of 5,700-5,705. So what exactly does that mean?
Well, simple really.
If you think the Footsie is likely go above 5,705 then you would instruct the broker you wanted to buy. And if you expected it to dip below 5,700 then you would instruct the broker to sell.
Clear?
Well, let’s say for the sake of argument, we believe the market will end the day below 5,700 - perhaps we think after the recent good run there will be a bout of profit taking.
So we tell our bookmaker to sell. In fact we are ultra confident and stake