Spread betting

DEFINITION of Spread betting

Spread betting is leveraged financial derivative. When spread betting, the trader is making a bet on the direction in which a market will move.

WHAT IT IS IN ESSENCE

The accuracy of trader’s bet determines the profit or loss when the position is closed.

When opening a spread betting position, the trader decides how much would like to bet for each point of movement in an asset.

Buy positions return a profit if the market increases in price, sell positions return a profit if it drops in price.

This is how to calculate the profit or loss:

 

Profit or loss = ($ bet per point x points moved) – charges to open and maintain position

 

Spread betting is a leveraged product. This means all that needs to be done is to put down a fraction of the full value of the trade in order to open a position. The margin depends on the market being traded and the size of the bet.

HOW TO USE

With this derivative product, you don’t actually own the asset that you’re speculating on. Instead, you trade on margin. This means you get the same level of exposure you would if you bought the underlying asset outright, but for a smaller initial outlay. It also means that you can bet on the price falling or rising. You buy when you think the price will rise, or sell if you think it will fall. You are closing your position by placing the opposite bet.

This is a cost-effective alternative to share buying or commodity trading. However, you can use it for speculating on short to medium term price movements.

Also, as you’re trading on margin, it’s important to understand the risks. You have to remember that if the asset value doesn’t move the way you expected, you’re still liable for the full amount of any loss as if you actually own the asset.