If you wanted to place a bet on the price of a stock index like the FTSE 100, for example, you might see the following prices on your spread betting platform:
If you think the value of the stock index will rise, you’d place your bet at the buy price of 6500.5. If you think it’s going to drop, you’d bet at the sell price of 6499.5.
The difference – or spread – between the buy and sell price is how spread betting gets its name.
What do the numbers mean?
Neither the buy price nor the sell price represents the exact value of the financial asset you’re betting on (also known as the underlying asset). Instead, the buy price is slightly higher than this value, and the sell price is slightly lower.
In the above instance, for example, the real-world value of the stock index would be halfway between the two prices, at 6500. The difference between the buy and sell prices is just 1.0 in this instance, which is a spread of one point.
This spread represents the cost that spread betting providers charge you to place your bet.
How does the spread affect me?
Narrow spreads are better for you because the market doesn’t have to move as far in your favour in order for your bet to make a profit.
That’s because to close a bet, you need to take the opposite action to when you opened it. So if you bought in the first place, then you’d need to sell. If you sold, you’d need to buy.
So in the case above, you might open a bet at the buy price of 6500.5. But in order to close the bet without making a loss, you’d then need to sell at the same price or higher.
This means the value of the underlying asset needs to rise by one point in order for you to break even.
Therefore the spread reflects how far the market has to move in your favour for your bet to become profitable.
When you place a spread bet, you stake a certain amount of money on each point of movement in the price of the asset.
So, you might choose to bet £1 per point of movement on the price of the FTSE 100 to fall. As above, you’re presented with a buy and a sell price.
Because you think it will fall, you sell at 6499.5.
Over the next few hours, the FTSE 100 does indeed fall. When you look again, you see the following:
To close your position, you need to do the opposite to what you did originally, so you buy at a price of 6479.5.
Despite the fact that the underlying market price has actually moved 21 points (from 6500 to 6479), the spread means you’ve only gained 20 points (from 6499.5 to 6479.5).
As you bet £1 for every point of movement, in this scenario you’d make a profit of £20 instead of £21. The extra £1 is your spread betting provider’s charge for dealing in this market.
This works the other way too, so had the value of the FTSE 100 gone up by 21 points to 6521, you’d have seen the following:
As you sold in the first place, you’d have to buy to close your bet, so in this instance you’d have made a loss of £22 (from 6499.5 to 6521.5) despite the underlying market only moving by 21 points against you.
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