When making a spread bet, you’ll naturally want to do so at the price that’s most beneficial for you.
The narrower the spread, the more potential for profit
This means searching for the tightest possible spread, because the tighter the spread, the less the market will have to move in your favour in order for your bet to become profitable.
You’ll usually find the tightest spreads on the largest and most liquid markets, such as major currency pairs.
Where do providers get their prices from?
When calculating the two-way price they quote, spread betting providers will use the underlying market price as their basis point.
So, if the FTSE 100 is currently valued at 6400, providers will wrap a spread around this to produce the ‘buy’ and ‘sell’ prices you’ll be offered. You therefore might see the FTSE listed at 6399/6401 or perhaps 6395/6405 – it will depend on the individual provider. However, to attract and retain customers, spread betting firms normally try to keep their prices as close to the underlying market as possible, aiming to offer the narrowest spreads they can.
Prices for exchange-traded assets
Any assets that are traded on regulated exchanges, such as shares, will already have a buy and sell price (and therefore a spread) in the underlying market. Providers add their own spread on top of this to determine the price they offer. For example, a share priced at 95p to sell and 98p to buy in the market might be offered at 94p to sell and 99p to buy if you’re making a spread bet.
Whichever market you decide to deal on, the sell price will always be below the current market price and the buy price will always be above the current market price. The size of the spread is generally dictated by the volatility and liquidity of the underlying market, while the expiration date of the bet will also be taken into consideration.
Prices for assets traded over-the-counter
A similar principle applies for assets such as forex that are traded over-the-counter (OTC) in the underlying market. However, as these assets are bought and sold directly through global networks of banks and liquidity providers who make their own prices, rather than via a single exchange, they don’t have a standard price.
Spread betting firms source the best buy and sell prices they can access from the network of providers, then add their own spread.
Prices for digital 100s
Pricing for limited risk products digital 100s works slightly differently.
The spread betting provider makes a price on a scale between 0 and 100 by taking into account:
- The underlying market’s current value
- Expectations of future volatility
- The time left until the digital 100 expires
Future volatility is the only variable here that can’t be objectively determined, and with this type of bet your aim is to forecast it more accurately than your provider.
Some spread betting providers will offer spread bets on markets, such as shares or indices, outside of their traditional trading hours. This enables them to offer continuous dealing opportunities, even when the underlying market is shut.
However, in these circumstance the providers cannot draw on the current market price as a reference, so will instead create their own prices.
For example, an out-of-hours index might be priced by taking into account the performance of other indices around the world that are open. By applying a mathematical formula to these related markets, providers can derive a ‘buy’ and ‘sell’ price for the closed index. However, since these prices are technically estimates, you’ll find that spreads for out-of-hours markets are generally wider.
Remember, out-of-hours prices may be very different to those which will be available when the market next opens, so dealing with them could lead to a profit or loss that would not have otherwise been incurred if you had waited.
Pricing in more depth
For more detail about how we price our markets at IG, watch our video.
Subscribe to 'The week ahead' newsletter
Ready to put theory into practice?
Try a spread betting platform with £10,000 virtual funds. Remember, losses can exceed deposits.