Category Archives: Spread Betting

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Spread Betting Simple Example

What is spread betting?

  • Spread betting is a derivatives product that allows you to trade on the price movements of thousands of financial markets including indices, shares, currencies, commodities and more.

    You can use spread bets to speculate on price movements irrespective of whether the markets are rising or falling. If you go long (buy), your profits will rise in line with any increase in that price. If you go short (sell), your profits will rise in line with any fall. Similarly, if you go long on the price and the underlying stock price falls, you will incur losses.

    What is spread betting

    Tesco share example
    Spread betting is a margin-ed product that only requires you to deposit a small percentage of the full value of your position. This means that the potential for profits, or losses, from an initial capital outlay is significantly higher than in traditional trading. The margin required is typically between 1% and 10% of the total value of your position, depending on the market.

     

    What is a spread?

    Just like other forms of trading, including traditional share dealing, we quote two prices for all our spread bets – a buy price (the price at which you can go long if you expect the underlying market to rise) and a sell price (the price at which you can go short if you expect the underlying market price to fall). The difference between the ‘buy’ price and ‘sell’ price is known as the spread.

     

sunk-costs

The Sunk Cost Effect in Spread Betting

 

Some psychologists refer to the psychological biases that effect the way we act as judgemental heuristics. Judgemental, because they affect our decision making processes, with heuristics being shortcuts that allow us to sift through and sort out information in a short period of time.

 

So, what is the sunk cost effect?

In the world of economics, sunk costs are costs which have already been incurred and therefore lost for good.

The sunk cost effect is the tendency human beings have to consider the amount of money already spent when making a decision.

An example of the sunk cost effect

As an example, let’s say you’ve spent £1,000 on a pair of box seats to go and watch Manchester United.

However, on the day of the game you have a genuine flu. Every part of your body aches. You desperately want to stay in bed. You know how it is.

A rational and logical approach to this would be to completely disregard the money that has been spent and weigh up the pros and cons of dragging yourself to the game and probably not enjoying one minute of it or staying at home where you’ll be more comfortable. The rational outcome being that you stay at home.

However, the sunk cost effect causes decision makers to put too strong a meaning on the money already spent. It causes a decision maker to go to the game regardless of how they feel because they have spent £1,000 on the tickets.

The sunk cost effect and trading

How does this example lend itself to trading psychology?

Well, let’s suggest a person new to spreadbetting has a £1,000 account and takes out a long position in a popular UK stock. Let’s go for Vodafone  for no reason other than it’s a well known and heavily traded UK stock.

Now let’s suggest that this new spreadbettor enters that trade at £1 per point with a 100-point stop loss. They are therefore risking £100 on the trade as this is the amount they will lose if their stop loss is hit.

After a few days pass, the price of Vodafone has fallen by 50 points and they are therefore £50 down. A few more days pass and the price falls down to -100 points. They are now £100 down and have lost 10% of their account in this one trade.

Consider how the sunk cost effect might affect that trader’s decision to at this point lower their stop loss and give the stock even more room. They have already committed 10% of their account to this trade.

The sunk cost effect will influence the trader’s rational thinking. Instead of staying committed to their previously designated exit the trader may look for ways to avoid wasting the £100 already spent on the trade by lowering their stop. The question then is what the trader does when their position falls to a -£200 loss.

Sunk costs and downward spirals

As you can see, it can often be a downward spiral. The longer the trader holds their position the more they are at risk of losing to the trade and this is one of many ways new traders can find their accounts disappearing very quickly.

What was initially a potential £100 loss has turned into a potential £200 or even £300 loss (30% of their account).

This is until the trader finally gives in from sheer panic and distress and finally closes the trade!

The way to avoid all of this is of course to pre-define your exit before you even place your trade and then, even more importantly, stick to this plan.

Overcoming these psychological barriers which affect your trading can have a significantly positive effect on your long term performance as a trader Spreadbetting the financial markets.

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The 10 most profitable spreads of 2014

2014 was another action-packed year of sport – and for betting. Some of the big stories in the sports world also made for moments to savour – or to forget – for punters.
Take a look at our top ten spread betting moments of the year below to gain betting inspiration for 2015!

10. FOOTBALL
Germany v Gibraltar, European Championship qualifier, 14/11/14
Market: Germany Corners Squared
Make-up: 400
Potential spread betting profit: 227
Most people will list Germany’s unforgettable 7-1 World Cup semi-final drubbing of hosts Brazil in their top 10 sporting moments of 2014, but for spread betters it was this slightly more low key European Championship qualifier that stood out.
Germany sauntered to a 4-0 win but also took 20 corners during the game meaning spread betters who bought Germany Corners Squared at 173 made 227 times their stake when the market made-up at 400. Sellers on the spread were left feeling well and truly cornered themselves having lost 239 times their stake.

9. CRICKET
The end of the Ashes, 05/01/14
Market: Mitchell Johnson Bowler Series Index
Make up: 445
Potential spread betting profit: 230
The year started off with Australia completing a 5-0 Ashes whitewash thanks to a comprehensive 281-run win over a beleaguered England side in the final Test in Sydney.
It was another forgettable moment for English cricket fans. But not for spread betters who got on Mitchell Johnson’s series bowling performance. Johnson took 37 wickets at the cost of 517 runs at an average of 13.97. Punters who bought his Bowler Series Index (10 points per wicket plus 25 point bonus for every five-fer) at 215 made 230 times their stake when the market made up at 445.
Sellers were left as shaken as the England batsmen by the antics of the marauding, moustachioed Aussie.

8. FORMULA 1
Mercedes win the 2014 Constructors’ Championship
Market: Mercedes 2014 Constructors’ Points
Make-up: 701
Potential spread betting profit: 245
It was known before the start of the 2014 F1 season that Mercedes had adapted best to the new rules and had the dominant car with the best engine. Commentators knew they would be good. But did they know they would be that good?
Lewis Hamilton and Nico Rosberg swept all before them taking 18 out of 19 poles and 16 out of 19 race wins.
Spread betters who bought on Spreadex’s Mercedes Constructors’ Points spread at 456 made 245 times their stake when Mercedes eventually finished on 701. Sellers of the spread were left feeling the pits as they lost more than 250 times their initial stake.

7. NFL
Chicago @ Green Bay, 09/11/14
Market: Touchdown Yardage
Make-up: 420
Potential spread betting profit: 305
Green Bay Packers won 55-14
Aaron Rodgers broke a host of records with six first-half touchdown passes as Green Bay Packers beat Chicago Bears 55-14.
Rodgers tied the team touchdown pass record with Matt Flynn, matched the NFL mark for a half set by Oakland’s Daryle Lamonica in 1969 and recorded his 16th scoring pass of 70 yards or more.
Spread betters who bought Touchdown Yardage at 115 also had a great day making 305 times their stake when the market made up at 420. Sellers hit the endzone with this particular bet.

6. FOOTBALL
FC Ural v CSKA Moscow, Russian Premier League, 27/9/14
Market: Goalscorers’ Shirt Numbers
Make-up: 400
Potential spread betting profit: 329
One of the most popular football spread betting markets for Spreadex clients is Shirt Numbers – the shirt numbers of goalscorers in a game, aggregated.
So when Ural and CSKA went head to head in this Russian Premier League game with players wearing shirt numbers as high as 88, 89 and 90 our traders knew there was potential for cargange.
Sure enough CKSA won 4-3 with the goals coming from Manacharyan (10), Smolov (90), Erokhin (89), Dzagoev (10), Eremenko (25) and brace for Doumbia (88).
Punters who bought Shirts at 71 made 329 times their stake while sellers were left to get a bit shirty themselves.

5. FOOTBALL
James Rodriguez wins the Golden Boot at the 2014 World Cup
Market: James Rodriguez Tournament Goal Minutes
Make-up: 402
Potential spread betting profit: 341
There were some great games, great goals and plenty of colour in the stands – yes it was largely a memorable World Cup from Brazil. Unless you’re an England fan, of course.
With Radamel Falcao injured, Colombia’s James Rodriguez stole the show to end up as Golden Boot winner with six goals and earn a lucrative move to Real Madrid.
Spread betters who bought his tournament goal minutes at 61 were also in the money as they won 341 times their stake. Any sellers would have been cringing every time the attacking midfielder found the net.

4. HORSE RACING
Grand National Meeting opening day, Aintree, 3/4/14
Market: Multi-Mules
Make-up: 942
Potential spread betting profit: 446
The Grand National is traditionally the big race of the year for punters across the land and in 2014 fixed odds punters who backed eventual winner Pineau De Re at 25/1 would have been left punching the air with glee.
However, for spread betters it was the opening day of the Grand National Meeting at Aintree that saw big profits for many.
Spreadex’s extensive choice of spread betting Card Markets features the likes of Multi Mules (winning horse racecard number multiplied by second placed horse racecard number for each race at a meeting, aggregated) and Squared Numbers (winning horse racecard number squared for each race at a meeting, aggregated).
So when results on day one included the likes of Warne (21) winning the 3.40pm with Tartan Snow (20) coming second followed by some other high racecard winners later in the day, it was a bumper payday for some horse racing spread betters.
Buyers of Multi-Mules at 496 made 446 times their stake when this market made up at 942 while buyers of Squared Numbers at 638 made 398 times their stake when this market made up at 1036.
Sellers of these markets were left feeling anything but grand.

3. FOOTBALL
The Netherlands finish third in the 2014 World Cup
Market: Netherlands Total World Cup Goal Minutes
Make-up: 913
Potential spread betting profit: 642
If James Rodriguez was the big surprise player of the World Cup then the Netherlands were certainly the surprise team of the tournament.
Drawn with then World and European champions Spain, dark-horses Chile and Australia, many thought the Oranje would struggle to get out of the group.
But a 5-1 trouncing of Spain followed by eventual elimination to Argentina in the semi-finals and then a third/fourth place play-off win over demoralised Brazil made it a tournament to remember for now-Manchester United boss Louis van Gaal’s side.
It was also a bet to remember for spread betters who bought Holland’s tournament goal minutes at 271 as they made 642 times their stake. For sellers the future was definitely not orange.

2. CRICKET
India v Sri Lanka 4th ODI, 13/11/14
Market: Multi 4s
Make-up: 1363
Potential spread betting profit: 733
Cricket is one of the most popular sports to place spread bets on with the ebb and flow of team or individual batsmen runs offering the perfect opportunity to open and close in-play bets.
However, there are also plenty of other cricket spread betting markets to bet on other than just runs with Multi 4s one of them (Team A 4s multiplied by Team B 4s).
When India won the fourth ODI against Sri Lanka by 153 runs in Novemember, the hosts hit 47 fours along the way (Rohit Sharma with 33 of them) while Sri Lanka hit 29 themselves.
Spread betters who bought Multi 4s at 630 made 733 times their stake while sellers were left feeling hit for six.

1. RUGBY
Northampton Saints v Wasps, Aviva Premiership, 10-05-14
Market: Northampton Multi-Points
Make-up: 1269
Potential spread betting profit: 932
2014 was a great year for Northampton Saints as they bounced back from the heartache of defeat to Leicester Tigers in the 2012-13 final to beat Saracens 24-20 at Twickenham in May to lift the Premiership trophy.
Along the way there were some scintillating performances, notably the 74-13 trouncing of London Wasps on the final day of the regular season. Saints ran in 11 tries in total and with the half-time score 27-13 it meant their Multi-Points (first half points multiplied by second half points) came in at a whopping 1269.
Buyers at 337 made a huge 932 times their stake while sellers were left feeling well and truly stung.

Man Reading Book and Sitting on Bookshelf in Library

Few hints before start spread betting

Before you place a bet, work out your worst case scenario should a bet go against you. For example, a football Total Goal Minutes bet is much more volatile than a football Total Goals bet and you may want to ensure your selected stake size reflects this.

• If you are a little nervous ahead of making your first bet, why not try a ‘paper trade’ where you write down your chosen bets and then record the profit or loss that each would have recorded. This helps you understand more about the volatility of different markets and how sports spread betting works.

• Try and bet on markets you know about. If you have a great understanding of golf and follow the game closely then it follows that our golf spread betting markets may make more sense to you than our NFL markets.

• If you are intending to bet on a market in-play (i.e. when you can open and close your bets during the match or event), try and make sure you are able to watch your event. If you are on top of the action it gives you greater opportunity to put your bets on at the right time.

• Stick to your betting plans! It’s all too easy to start raising your stake sizes after a couple of wins or even to chase your losses. However, remember that increased stake sizes can mean increased losses should the bet go against you. As per rule one, always work out your worse case scenario each time so you know what you are risking when you place your bet.

Celebration champagne

The 10 most profitable spread bets of 2013

Top 10 Sports Spread Bets of 2013

Take a look at our top ten spread betting moments of the year below to gain betting inspiration for 2014!

10. TENNIS
Novak Djokovic v Juan Martin Del Potro Total Points, Wimbledon semi-final, 5/7/13
Winning margin: 128 times original stake
Andy Murray made history in 2013 by actually smiling when he became the first British male to win Wimbledon in 77 years in July.
But why did his nemesis Novak Djokovic not put up a sterner test in the final? Because he was still shattered from his incredible encounter with Juan Martin Del Potro in the semis just two days before, that’s why.
The Argentine pushed Djokovic all the way in the longest ever Wimbledon semi-final in history which ended with the Serb squeaking home 7-5, 4-6, 7-6, 6-7, 6-3 in four hours and 43 minutes.
Spread betters who bought Total Points at 240 made 128 times their original stake when the players contested 368 points in total during the match.
Those who put their money on the match being a short-lived affair were left to cry into their strawberries and cream.

9. CRICKET
Chris Gayle Player Performance, Bangalore v Pune, 23/4/13
Winning margin: 170 times original stake
Chris Gayle’s unbelievable batting display in the IPL in April had the purists purring as the West Indies captain hit the fastest-ever century in professional cricket on his way to 175 not out.
The man-mountain reached triple figures in just 30 balls for the Royal Challengers Bangalore, eventually smashing 17 sixes and 13 fours in an astonishing unbeaten knock.
If that wasn’t enough, Gayle also chipped in with two late wickets with the ball.
For spread betters who bought his Player Performance quote at a meagre 45 (spread based on 1pt per run scored, 20 per wicket taken, 10 per catch taken and 25 points per stumping), it meant profits of 170 times their original stake size as the market made up at 215.
Anyone getting against Gayle on this occasion would have been left well and truly stumped.

8. DARTS
Taylor v Lewis Multi 180s, Grand Slam of Darts semi-final, 17/11/13
Winning margin: 191.5 times original stake
Some say it’s one of the best games of darts of all time. When world number one Phil Taylor went head-to-head with fierce rival Adrian Lewis in the semi-finals of the Grand Slam of Darts at Wolverhampton Civic Hall in November, the pair hit a PDC record of 32 maximums during a scintillating display of ‘arrers’.
Such was the quality on show during the battle between the two Stoke-born players that Lewis lost despite averaging 110.99.
Shrewd spread betters who bought Multi 180s (Taylor’s total 180s multiplied by Lewis’ total 180s) at 60.5 made profits of 191.5 times their original stake when the market settled at 252.
Those who sold on the spread were left to appreciate the high standard on show if not the lighter feel to their wallets.

7. CRICKET
Fall of 1st England Wicket, Australia A v England Ashes warm-up match, 8/11/13
Winning margin: 262 times original stake
England ended the year losing the Ashes. We all know that. And it was painful. Yes, they were rubbish. Humiliated. Embarrassed.
However, it didn’t look like it was going to be this way after a 3-0 summer series win over Michael Clarke’s men and then a promising performance from new opening pair captain Alastair Cook and Hampshire hitter Michael Carberry in a tour warm-up match Down Under against Australia A in Hobart in November.
In what was to be a rather misleading display of form, Cook made 154 before retiring out and Carberry 153 before stepping down in the same way.
Spread betters who bought Fall of 1st England Wicket at 56 made 262 times their original stake size when the market settled at 318.
Sellers were out of pocket on this occasion, but were in the money when the real action began as Cook and Carberry flopped spectacularly.

6. FOOTBALL
Shirt Numbers, Rubin Kazan v Dinamo Moscow, Russian Premier League, 26/9/13
Winning margin: 269 times original stake
Whatever happened to the former Blackburn and QPR centre-half Christopher Samba? He went to play in the Russian Premier League that’s what.
And when the giant Dinamo Moscow defender put into his own net against Rubin Kazan in a league match in November it sparked a payday for spread betters buying goalscorers’ Shirt Numbers.
Samba was wearing number 84 (own goals count towards the total in this market) and other scorers in the 2-2 draw included Gokdeniz Karadenis wearing 61, Aleksai Ionov wearing 99 and Alexander Kokorin wearing 91.
It meant a make-up of 335 and profits of 269 times the original stake for anyone who bought at 66.
Punters who were backing a low goalscoring affair were left to rue the Russians’ penchant for high team squad numbers.

5. FOOTBALL
Total Goal Minutes, Man City v Arsenal, Premier League, 14/12/13
Winning margin: 368 times original stake
Manuel Pellegrini may not sport a scarf in the stylish manner that his predecessor did, but he certainly stuck his neck out in his commitment to football with flair at the Etihad after taking over from Roberto Mancini.
It’s been goals galore at home for the Citizens since the Chilean took over at Manchester City and the most spectacular of these net-busting occasions was arguably the 6-3 dismantling of Arsenal in December.
A clutch of late goals helped bump Total Goal Minutes (the aggregate minutes of all goals scored in a game) to a huge 531 meaning punters who bought at 163 made 368 times their original stake.
Sellers of Total Goal Minutes were left with a painful experience – however, given City’s free-scoring record ahead of this game, those going short were few and far between.

4. FOOTBALL
Corners Squared, Roma v Cagliari, Serie A, 25/11/13
Winning margin: 541 times original stake
When former Arsenal misfit Gervinho struggled in front of goal for Roma in a 0-0 draw against Cagliari in Serie A in November, most football fans would have been grateful they hadn’t watched the game.
However, those with a knowledge of football spread betting are aware there is much more to trading the game than merely betting on straightforward markets such as the match outcome or number of goals.
Punters who took on Spreadex’s infamous Corners Squared market (total number of match corners taken, squared) would have been astonished to see 26 corners taken in total during the match.
Buyers at 135 made 541 times their original stake when the market made up at 676.
Anyone selling on any of the large choice of corner-related markets was caught flagging on this occasion.

3. HORSE RACING
The Grand National – Multi-Mules: 6/4/13
Winning margin: 550 times original stake
Everyone loves a flutter on the Grand National. Usually it’s your nan or next door neighbour putting their one £5 fixed odds bet per year on a horse they like the colours of.
But for spread betters there are a whole plethora of betting opportunities on the nags.
Multi-mules is a popular market which multiplies the racecard number of the winning horse with the racecard number of the second placed horse and aggregates them for all races across a meeting.
On Grand National day at Aintree, Aurora’s Encore romped home wearing 35 from Cappa Bleu wearing 18, meaning Multi-Mules made up 630 for this race alone.
Across the whole day, Multi-Mules made up at 1304, meaning spread betters who bought at 754 made 550 times their original stake size.
Those going short on this particular market on this day were left feeling like donkeys.

2. FOOTBALL
FA Cup First Round – Cross Goals: 9/11/13
Winning margin: 703 times original stake
The early rounds of the FA Cup often throws up a few mismatches with non-league sides facing rather more organised and far fitter lower league teams.
This was the case in the first round proper in November with some of the high-scoring results including Mansfield winning 8-1 at St Albans, Brentford thumping Staines 5-0, Preston hammering Barnet 6-0 and Leyton Orient quashing Southport 5-2.
Spread betters who bought First Round Cross Goals (total home team goals multiplied by total away team goals) at 2,356 made a profit more than 700 times their stake size when goals aplenty across all the ties saw the market settle at 3059.
For anyone predicting a day of few goals it was a first round to forget.

1. RUGBY UNION
Rugby U20 World Cup, England Multi-Points, England v USA, 13/6/13
Winning margin: 1,415 times original stake
You can spread bet on almost any market on any sport you can imagine. How about England Under 20s’ first half points multiplied by their second half points in the Rugby Under 20 World Cup group game against USA in Vannes, France in June?
Didn’t jump out at you at the time? Well, those that bought on the spread at 1,513 were left in punters’ dream land when England romped in 48 points in the first half and a further 61 in the second half for a huge 109-0 win.
It meant England Multi-Points made up at a massive 2,928 and profits of 1,415 times their original stake for buyers.
However, anyone getting on the wrong side of the spread was well and truly mauled.

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Spread betting trading : Emotions and IQ

Contrary to what most novice traders believe, success in trading or financial spread betting is not down to your understanding of winning strategies, trading systems or even money management techniques. Of course, all these enhance your chances. However, most successful traders agree on one basic premise. The single most important element of successful trading or spread betting is the mental or emotional aspect. Unfortunately, this element is usually the last to crop up in the mind of the novice trader or spread better and as such it is usually the last to receive any attention.

If there is anything that we hope to pass on to you on this website, it is this: true mastery of financial spread betting will only come once you have mastered what I refer to as spread betting emotions and the attendant emotional response to the markets.

Notice that we wrote “emotional response”. This is because no single trader or spread better has any control over the markets. The only control we have is over ourselves and our decisions. As we conduct our analysis, the best that we can hope for is that we interpret correctly what the data is saying. As professional traders say, the market has a mind of its own and it will do what it wants. While our analysis may turn out to be correct or wrong, the real determinant of whether or not we end up winners or losers is our emotional or mental reaction to the result of our position in the market. How you deal with your spread betting emotions is crucial to your success.

Consider for instance that unlike with most other activities, in trading as in financial spread betting there is really no starting or ending point. The wheel is in constant motion and you decide when to get on and when to get off again. Either way, the party goes on. This presents a number of challenges for novice traders and the professionals alike. Spread betting emotions often lead to over trading for this reason.

Even after conducting analysis, where does the novice spread better find the initial confidence to pull the trigger especially when faced with all sorts of contradictory spread betting emotions?

• Good times may be easy to deal with but, how do you deal with the emotional drain of down times without digging yourself deeper into the loser’s hole?

• If you find yourself in a bad trade, how do you work your way back out? Quite often, the best option is to cut your loses and get out of the trade asap. But try telling the novice spread better that a small loss may well be the best way to learn an important trading lesson. Bottom line is that this is emotionally difficult to accept.

• How do experienced traders push through the ceiling of profitability that caps their initial trading years and make a truly fabulous living?

Trading and financial spread betting are performance-oriented activities. Stress and mental pressures can inhibit your ability to function effectively with potentially nasty implications for your bottom line.

Here are a number of important points to note as you develop a winning mental attitude to financial spread betting:

• Intellect (at least in the academic sense) has nothing to do with your ability as a spread better. Success is not a function of how smart you are or how high your IQ is. This is hard to accept for most people.

• No matter how long you have been spread betting, there is no customer or client goodwill built up each day in your business. Each day is a clean slate. Try and maintain a sharp focus during the trading day. Just as importantly, make sure you take time out of the market every now and again to recharge your batteries. The market can be mentally draining and spread betting emotions can often run high—even for the most experienced players.

• Success in financial spread betting is not a factor of how much effort you put in. Simply put, the traditionally 9-5 work ethic doesn’t apply in this business! A trader could sit in front of a screen all day waiting for a trading opportunity and have nothing happen. Patience is crucial. There is a temptation—often driven by what I like to refer to as spread betting emotions—to take marginal trades just so you feel like you are doing something. Do not fall into this trap. Spread bet only when there is a clear money making opportunity.

Spread Betting Risk Management

Spread Betting Risk Management

What are the risks?

Unlike most traditional financial dealing services, spread betting is a leveraged product. This means that your initial deposit payment gives you exposure to a comparatively larger portion of an underlying market than if you bought the instrument directly (via a stockbroker, for example).

This means that spread betting can result in losses that exceed your initial deposit. And without good risk management, it becomes possible to make significant losses over a short period of time. It is therefore important to understand risk and learn how to manage your portfolio effectively.

How do I manage risk?

    1. Understand your market

      Before dealing, it is important to understand the market on which you are taking a position. Knowing the potential for each market to experience volatility and establishing the likelihood of sharp price movements is essential when considering the risk associated with each bet. For example, historically some markets are less likely to make sudden discontinuous jumps, while others, such as shares (which can be subject to profit warnings and the like), may be more likely to make abrupt movements.

    2. Monitor your open positions
      An equally important risk management strategy is simply to closely monitor your open positions. This is particularly relevant if you have not attached a stop-loss. Volatile markets can move hundreds of points in minutes, and while a good understanding of your market may help pre-empt extreme fluctuations, there is no substitute for actively monitoring your account.

    3. Use stop and limit orders
      There will inevitably be times when it is impossible to keep an eye on your open positions. This is why we offer a range of order types to help you manage risk without capping your potential for profit.
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Spread Betting 101

Spread betting simply allows you to speculate on whether the price of an asset will rise or fall. You can gamble on everything from shares and commodities to stock market indices and football matches.

The beauty is that you don’t actually have to buy the underlying asset you want to trade. You just take a view on the prices offered by the spread betting provider as to whether the price will rise or fall.

How spread betting works

Spread betting firms offer you a quote, which consists of a bid (selling) price and – slightly higher – offer (buying) price. Take the following example. If the FTSE 100 stands at 4700, the spread betting provider will likely offer you a bid price of 4698 and an offer price of 4702.

If you think that the index will rise, you might “buy” for £10/point at 4702. For each point the FTSE 100 rises, you will earn £10. Say the FTSE rises to 4722 by the day’s close, and you decide to close out your bet. Your profit will be £200 (4722-4702 = 20 x £10). In contrast, if you think the market will fall, you “sell” at 4698.

 

But there are risks as well as rewards in spread betting. Although you can make a lot of money from wagering a small stake, you can lose money fast, too. So if you sell the FTSE100 for £10/point at 4698, and it actually rises to a spread of 4720/4724, you lose £260 (4698-4724 = -26 x £10).

Because you can quickly lose lots if your trade goes wrong, spread betting firms demand some protection that you’ll eventually be able to settle up. This is a deposit called ‘margin’. It varies in size, but is usually around 10% of the value of your bet. If your losses on the trade threaten to exceed that margin, your provider will demand more money, known as a margin call. If you can’t come up with this, the provider will close out your position at the current price.

You’ll go broke quite fast if you depend on margin calls to control your losses. So a much better way is to use stop losses. These are orders to close out a trade at your specified level. In the above example, if you sold at 4698 but set a stop loss at an offer price of 4710, your loss would be just £120 (4698-4710 = -12 x £10).

There is a potential problem with ordinary stop losses however – “gapping”. That’s where the market is moving fast and lots of stop-loss orders are triggered together. Since they close at the market price closest to the specified price on a first-come, first-served basis, you may not get out at the level you expected.

 

The solution to this problem is slightly more expensive but well worth considering – the guaranteed stop. Here you pay your broker a slightly wider spread to get you out at a preset price regardless of how many other stop orders are triggered alongside yours. In effect your broker is buying you out of the trade. At times of high volatility in particular, that’s insurance that’s well worth paying for.

 

What are the advantages of spread betting?

One reason is the tax break. Under UK law, there are no taxes on your betting profits, either stamp duty or on capital gains. Another is that it can be an easy and cost effective way to trade. When you buy shares through a broker, you have to pay a fee. With spread betting you don’t. This is because the spread betting provider makes his money from the difference between the bid and offer prices.

But it’s not just about cost. Spread betting lets you speculate on a whole range of markets that would otherwise be difficult to access. For example, as well as betting on currencies, you can bet on how many seats a political party will win in a general election, or how many runs a cricket team will score in its innings.