Spread betting is a derivative which allows you to speculate on the price direction of a certain instrument without the need to own the underlying asset. To put it simply, you are predicting if its market value will go up or down. Your profit or loss will be based on how much the market has moved in your favor or against you.
How does spread betting work?
With spread betting, you can speculate on the price movement of a wide range of markets including stocks, indices, currency pairs and commodities. If you think that the market price of an underlying asset will go up then you need to place a Buy order but if you think that the price will go down then you need to place a Sell. Once you have decided on which order to execute, you need to place your stake. This will be the amount that you will either earn or lose per point so if the market moved 5 points in your favor then you gained 5 times the amount of your stake. Otherwise, you lose 5 times the amount of the same stake.
Let’s have an example:
Suppose that Facebook is trading with a Buy and Sell price of 172.55 and 172.20, respectively and based on your assessment, its market value will go up in the coming days. For this reason, you decided to place a Buy on this company’s shares at 172.55 for £15 per point.
After a few days, Facebook’s market value has gone up with a Buy and Sell price of 173.05 and 172.96, respectively and you finally decided to close your trade by placing a Sell order while the movement is in your favor. This results to a profit of £610 which is computed by this formula: (17296 – 17255) x 15. Do take note that daily funding fees or charges are still not deducted from your profit.
Otherwise, if Facebook’s shares have gone down to let’s say a Buy and Sell price of 171.95 and 171.81, respectively and you decided to close your trade by playing a Sell order then you will end up with a loss of £1110 excluding daily funding fees based on the formula of (17255 – 17181) x £15.