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

Understanding Shorting

There is also a selling practice known as “Shorting”, this is where a trader agrees to sell shares without actually buying them from the market. The expectation is that the share will soon fall in value below the price the trader has agreed to sell the shares in the first place.

In this type of transaction, the trader is in effect ‘borrowing’ the shares from a third party to open the bet.

So when the trader finally buys the shares to fill the order at the lower price, the trader will be in profit. This is effectively profiting from a falling market price.

Shorting is not a strategy easily available to private investors in the UK, but it is an option available to spread betting customers. By placing a “sell bet” on the spread of a stock, a trader can make a lot more money and in turn face much more risk than a trader who was going long on that stock.

Example - Opening a short position

As in the previous examples, the Spread Betting company quotes the trader a spread of 340-350 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.

The trader decides to place a spread bet and short the stock of Company X at £10 per point in the hope that the share price will fall.

When he decides to close the bet, the sell price is quoted as 425 and the buy price is 435, so the price has in fact risen and the spread has moved against him. The loss is calculated as:

435 (quoted buy price) – 340 (opening sell price) = 95 points.

95 x £10 = £950.

The trader loses £950 with this spread bet.

The most risky part about shorting a stock is that there technically is no end to the loss that is incurred. A stock price can keep on rising indefinitely, therefore it is very important that traders place “stop loss” instructions

Example - When shorting pays off

If the trader had predicted the stock price of Company X would fall and it did, it might happen like this:

Still using a rate of £10 per point, the trader sold the shares at 340, and then bought them back at 310, the spread is 30 points.

30 x £10 = £300.

The trader makes a profit of £300.