What is Financial Spread Betting?
Financial Spread Betting is a way of trading on a financial market or product such as a share or a commodity without having to physically own it.
Spread Betting allows you, an investor, to bet on whether the price of a financial instrument will go up or will go down in value. For every point an instrument moves in your favour, you win multiples of your stake and for every point it moves against you lose multiples of your stake.
Your profit or loss is the difference between the price at which you buy and the price at which you sell. As you do not physically own the product, but bet solely on price movements, you can profit from falling markets as well as rising markets.
If you think that a certain financial market will rise in value, then you ‘buy’ the product, known as ‘going long’, and you will aim to sell it at a higher price. If you think that a financial market will fall in value, then you ‘sell’ it first, known as ‘going short’, and aim to buy it back at a cheaper price.
‘Buying’ a rising financial market
If you buy a financial market that you believe will rise in value, and in due course your prediction is correct, you can sell the market for a profit. Financial Spread Betting is not without its risks though, and if you are incorrect and the value falls, you make a loss.
‘Selling’ a falling financial market
If you sell a financial market that you believe will fall in value, and in due course your prediction is correct, you can buy the market back at a lower price, for a profit. If you are incorrect and the value rises, you make a loss.
Margin Trading
Spread Betting is a leveraged product which means that you are only required to deposit a fraction of the overall value of the trade. Typically margins with CMC Markets vary between 1% and 10%. Margin enables you to magnify your return on investment. However, losses will also be magnified so margin trading is not necessarily for everyone.
What is the ‘spread’ in Spread Betting?
Prices of financial instruments are quoted in pairs known as the bid and the offer. The bid or ‘sell’ price is quoted first and the offer or ‘buy’ price is quoted second. The spread is the difference between bid and the offer. If you were viewing the price of Vodafone for example it would look like this:
Vod 1.25 / 1.55
The price to the left is the Sell price and the price to the right is the Buy price
If our Vodafone spread is priced at 1.25/1.55, that means you could either:
Buy at 1.55 if you thought Vodafone will rise in value
Sell at 1.25 if you thought Vodafone will fall in value
