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Basics of Spread Betting

Spread betting is a risky business, and depending on who you believe, leaves 80% of punters on the losing side. It is also about trading a derivative (i.e. an instrument that has been derived from the cash item namely the share itself).

There are therefore no dividends and the derivative has a 'contract life', normally three months. Contacts expire, but can generally be rolled over into following periods.

Traders can bet on rising and falling prices, something which is not easy to achieve in more traditional 'cash' markets and means spread betting sites like Sporting Index serve a purpose.

As you will note we are using betting jargon, as this is more to do with gambling that investing and trading. It is called spread betting for a reason and not spread investing

It's actually quite a dangerous tool, since it uses leverage to allow you to control large blocks of shares with very little cash in your account but leaves you in debt if you're not careful.

Most online bookies work on a highly geared, leveraged account, probably around 1:10, which means in effect that with only £100 in your account you can control £1,000 of shares.

The concept of spread betting in principle is very simple. The company quotes a spread of two prices for a particular instrument and that's the basis of your spread bet.

The instruments covered include shares, stocks, commodities, and even the major indices. The bets are not limited to the financial markets, with many companies now offering free bets on sporting spreads, political betting and the winners of TV reality shows like the X-Factor.

Spread Betting Example

Lets suppose you are interested as a financial trader in HSBC bank shares. So you call or look on the website for the shares and are quoted a spread of two prices of 604 - 606.

You think the share looks good for the longer term and decide to go long, or buy. Now your profit or loss is governed by how much you staked for each point movement.

Lets now suppose that you claim a bookies free bet offer and bet £5 per point.

Then had you forecast correctly you would have made: (634-606) x £5 = £140, and had you forecast incorrectly then you would have lost (606-558) x £5 = -£240 easy really!

Note that at £5 per 1p movement you are effectively managing a block of 500 HSBC shares since £5 = 500p. You are trading £3,000 of stock with only a few pounds in your account.

This is why spread betting is so dangerous if you do not know what you are doing.

Spread Betting Advantages

One of the advantages of spread betting is that it provides a simple method for going short (selling an instrument which you think is going to fall in value, then closing at a lower price).

Whilst it is possible to sell stock and shares short in a trading in a trading account, but you will need to hold a margin account in order to be able to do it.

The shares are borrowed by the broker from another client and lent to you without the owner's knowledge. You then sell them short. There are various rules which you must be aware of in terms of the 'up tick rule', and not all shares can be shorted. In addition if you are holding a short position and a dividend becomes payable, you are responsible for paying it!

With regard to the spread you are quoted, these will vary from company to company, and minute by minute depending on the underlying instrument and the volatility of the market.

It will also vary on the length of the contract you ask for - a quarterly contract will have a wider spread than a near term contract. Contracts can be rolled over and you will need to decide well in advance what you want to do at this stage.

All these online bookies offer starting stakes which are very small. You can trade with some of them for as little as 1p per point which effectively means you are trading one share.

Why not - it is an excellent way to learn and you will not burn your fingers. I actually think this is better then paper trading (pretend trading) as it is real money albeit small amounts.

As I have said before, when you start in a new market or a new trading tool, start small while you learn. Build up a track record and gradually increase your stakes.