Spread betting was once only associated with big financiers in the city. However, the ever evolving market has changed the perception and association of this fantastic financial tool. The fact that is now the number “one” choice of financial derivative for private investors is not surprising due to the range of benefit it offers.
How do you define Financial Spread betting? Spread betting is an art of outperforming the market through the use of well calculated and precise strategy.
Spread Betting Mechanics:-The mechanics of entering and exiting bets are very straight forward.
Typically, when you want to buy a traditional share, you contact a stock broker who will then issue you with a two way price for the underlying security you wish to buy. The lower of the two prices, which is the one you will get if you are selling the share, is called the bid price. The higher quoted price is what you will have to pay if you are buying shares, and is the offer price.
The difference between the two prices is called the ‘Spread‘.
In principle, this is very parallel with how the spread betters deal with their transactions, where you are offered to way price Offer/Bid.
Why Spread Betting:- The risk involved in financial spread betting is high indeed; however I’m a firm believer in using well calculated and precise strategy to beat the financial markets as I believe it generates better returns than a standard stock purchase. The pros are thus numerous and abundant.
Opening a Long Position:- If you get a quote of 640-645p for shares in company X. You then place a buy trade after your research, the finding will be thus
|Opening Buy price||645|
|Quoted Sell price when bet is closed||665|
Using a rate of £10 per point, you bought the shares at 645, and then sold them back at 665, the spread is 20 points.
20 x £10 = £200 profit
Understanding Short Positions:-“Shorting” the market is terms most people use too often but don’t know how it works.
Going short on a share is where you agree to sell shares without actually buying them from the market. The expectation is that the share will soon fall in value below the price you have agreed to sell the shares in the first place.
Shorting the market is not a strategy that most private investors normally use, but it is a major option available to betters in the market. By ordering a “SELL” bet on a stock, you can make a lot more money but you could also face more risk than if you go long
Example – Opening a short position
Just like the previous example the spread betting company will quote you a spread of 640-645 for shares in company X. The sell price here will be 640p, the buy is 645p. You then place a sell trade based on your research and findings that the share price will fall, it might happen like this
|Opening sell price||640|
|Quoted buy price when bet is closed||610|
Still using a rate of £10 per point, you sold the shares at 640, and then bought them back at 610, the spread is 30 points.
30 x £10 = £300
You will make a profit of £300. Isn’t that great!!!