Wednesday, September 8th, 2010
Introduction to Spread Betting
If you feel like striking out for yourself – and thus avoiding interviews of any kind for a while – or you simply have a bit of disposable income and you'd like the chance to try taking a gamble, financial spread betting offers the opportunity to take a short term interest in the stock market.
Spread betting is basically a way of betting on the movements of the money markets without actually buying any stock. In the parlance of the industry, you simply ‘take a view’ on the movement of the price of a particular commodity or index of commodities (such as the FTSE or NASDAQ) – and you wager on the price going either up or down.
In traditional stock market trading, there are two prices offered by traders for shares; one is the price offered if you are buying shares, the other is the price you’ll get if you are selling. The ‘offer’ price is the sum offered by the trader if you wish to buy shares. The ‘bid’ price is what they will pay if you are selling.
The difference between the bid and offer price is called the spread. For example, an index like the FTSE stands at a value of 4500. Typically, a spread betting company like Trade Fair might offer a bid price of 4498, and an offer price of 4502. If you think that the FTSE will rise over the course of that day’s trading, you could bet $10 per point by ‘buying’ at the price of 4502. If the FTSE reaches 4600 by the close of trading, you’ll have won $980.
A note of caution is appropriate at this juncture; as with all gambling, there is the potential to lose as well as win money. Given the above example, a fall in the FTSE to a value of 4400 would leave you owing the spread betting company $1,020. To ensure that you can cover such a loss, the spread betting company will usually require you to make a deposit, known as the margin. If the movement of the markets dictates that you are approaching the limit of your margin (the margin is usually set at around 10% of your bet) the spread betting company will demand a larger deposit – this is known as a margin call. If you do not wish to ride out the situation in hope of a sudden rise in the market, and do not want to increase your margin, your bet will be settled at this point in time, at the current market price.
If you like the idea of this kind of gambling, but are unsure of how to get started, a good way to acquaint yourself with the process can be through the practice accounts offered by many of the spread betting companies, which allow you to gamble with a fictional account on the movements of the real money markets.