Beginners Guide to Spread Betting

New to Spread Betting?

The Spread Betting Trading Centre has compiled the following guide
to explain how Spread Betting works

What is "Going Long"?

This is the term used to describe the buying of shares in the hope that they will rise in value. A trader may open a long position, for example, on a company whose shares he considers to be undervalued in order to sell the shares for a profit at the close of the trade.

Example - Profiting from a Long Position

Buy Price Sell Price

The Spread Betting company quotes the trader a spread of 350 for shares in Company X. The sell price is 340p, the buy price is 350p. The trader bets £10 per point on the share going up in value from the buy price of 350.

When he decides to close the bet, the sell price is quoted as 425 and the buy price is 435, so he was correct in predicting that the share would rise and therefore makes a profit.

The spread (difference between buying price and selling price) is 75. The profit is calculated like this:

425 (quoted selling price when bet is closed) - 350 (opening buy price) = 75 points.

75 x £10 = £750.

By placing this spread bet, the trader makes a profit of £750.

Example – Going Long and losing

When a trader decides to make the most out of his investment by betting on the spread, instead of simply purchasing the stock, this can be a very smart strategy if the value of the stock increases (as shown above). However, if the value of the stock decreases the trader stands to lose much more on a spread bet than he would on a normal investment.

Let’s say the spread company sets Company X’s spread at 340-350, as we did in the previous example. The trader again bets £10 per point on the share rising from the buy price of 350.

This time, instead of the stock value rising, it falls to 255-265. The loss that the trader would incur on this spread bet would be as follows:

350 (opening buy price) – 255 (quoted selling price when bet is closed) = 95 points.

95 x £10 = £950

By placing this spread bet, the trader lost £950.

Even though the stock changed 85 points in both examples, the trader lost £200 more in the first example than he gained in the second. This is part of the underlying risk in spread betting. In order to make a profit the value of the stock must beat the spread and the sell price must surpass the buy price.