How Spread Betting Works
Spread betting is most easily explained through an example - the concept is the same whatever the market.
Imagine that in early August you believed the FTSE 100 index's value of around 6230 was too high and that share prices would fall over the following month or so.
Accordingly, to spread bet City Index for a quote - it gave you a FTSE 100 price for the third week of September of 6165-6175. Based on that spread, you had two choices. You could have bet on the index falling below this level, by selling the index. Or you could have bet it would be higher than this in September, by buying the index.
Either way, you bet by staking a sum, say £10, per point. As you expected the Footsie to fall, you took the former option. Now imagine that on 17 September, the FTSE 100 actually closes at 6020, 145 points below the City Index spread. On this basis, your profit would be £1,450 - 145 times your £10 stake.
In fact, you do not have to wait until 17 September to book your profits. Gamblers can close their bets as soon as they become profitable. If the index had stood at 6050, say, on 1 September, you could have closed out your bet by reversing it - buying points from City Index.
However, the downside of spread betting is that the potential for large gains is equalled by that for large losses. Imagine that you had bought, rather than sold, points from City Index in the example above. Your loss would have been a nasty £1,550 - £10 times the 155 points the Footsie finished below your opening spread.
It is important to note that in spread betting gains and losses are geared. The more right you get a bet, the more you win. But the more wrong you are, the greater your losses.
Not surprisingly, spread betting companies are wary about bad debts. They will only extend credit to investors who can meet any losses. Expect calls for cash from your bookmaker if your bets move into the red.
On the other hand, all the firms say that, unlike conventional bookmakers, they do not lose on winning bets, as they lay off risks in the underlying markets. Spread betting firms, therefore, do not mind successful gamblers.
Next : How Spread Betting Started
Full Contents
• An Introduction to Spread Betting
• What is Spread Betting?
• How Spread Betting Works
• How Spread Betting Started
• Spread Betting Terminology
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