Summary: This article looks at 7 vital things to understand when you learn how to spread bet, with an emphasis on financial spread bets.
Lesson 1: Basic Principles. A spread bet is a financial commitment about the outcome of an event. That event could be the number of goals in a football match, runs scored in a cricket match, or the rising or falling value of a stock market index.
A number is quoted relative to an outcome, lets say it is a stock market index. The quote might look something like this:
Expiry date - Market - Spread - Current Price
10 March - FTSE 100 - 5800-5810 - 5782
The number in the middle (5800-5810) is the estimate (guess?) of the firm as to where the FTSE 100 will close on 10th March (most index markets can be traded on a daily basis). Looking at the current price of 5782, they think that the FTSE 100 is headed upwards slightly.
The trader (you?) has the option of:
a) doing nothing,
b) selling the quote because you believe that the market will not reach 5800
c) buying the quote because you think the market will rise above 5810
Lesson 2: Points And The Unit Stake. In taking a position - buying or selling a quote - there must be a financial interest. This comes in the form of 'points'.
Continuing our example, having bought the market above 5810, if it closes at 5830, there is a difference (a gain or profit) of 20 points in the FTSE 100. To calculate how much that means in terms of a real financial gain, it must be multiplied by the 'unit stake'.
If the market closes with a price inside the quote, lets say 5807, the trade closes with a loss to the trader of the difference between the closing price and the quote (3 points) multiplied by the unit stake.
The unit stake is the amount that has been wagered on the
outcome. For example, this might be £1 per point. In our example, the
FTSE 100 is up by 20 points, which means a £20 profit.
Watch These Free Videos And Learn How To Trade Financial Markets
Lesson 3: You Can Be Negative. In terms of investing, most
options for the private investor or trader are one-way - upwards. Buying
a stock means a share in ownership and hoping that it rises upwards in
value and price.
For the person that believes a stock will fall in price, their main option is to sell any ownership that they may have in it. In financial markets, spread betting enables a trader to sell the quote and bet on, and profit if, the price falls.
Lesson 4: Understand The Risks. Trading on an index is a potentially risky undertaking. It goes without saying that there are a great many factors that could influence a market that a trader might be completely unaware of. Examples in early 2011 of a tsunami, earthquake, civil unrest in oil producing nations and UN resolutions seem to come from nowhere and impact markets.
Should a market take a sudden turn in the wrong direction to the tune of 100-150 points, the financial impact on a trader could be horrific. For example, 125 points at £100 per point would be a loss of £12,500 - and it could take just a few minutes to happen.
For these reasons financial spread betting companies are quite
careful about their clients and are keen to understand their financial
position. They are required to know about a trader's finances by law
in case a trade goes horribly wrong. This is less about knowing that a
player knows how to spread bet, and much more that they can afford to.
Lesson 5: Learn About Financial Markets. With the potential to
win or lose that much money so quickly, it would seem reasonable that a
firm grasp of stock markets, economics and technical analysis might be
in order!
When spread betting on sports, there is almost certainly some implied knowledge from the lay person. Even your author, as finance-geeky as I may be, knows enough about soccer to see occassional obvious results. Or, perhaps I know enough about soccer to know that I don't know enough to gamble on it... That is not always the case when people play the financial markets!
The point is that learning how to spread bet is relatively easy, most people could pick up the basics in under an hour. However, learning how and why stock markets move as they do and the impact of the latest news will take much longer. Be sure to get whatever education you need.
Whilst this guide is written for beginners to spread betting, we
do not recommend that beginners to financial markets use spread betting.
Watch These Free Videos And Learn How To Trade Financial Markets
Lesson 6: Timing. Spread bets can be made 'in running', which
means that they are made live in a moving market. The best way of
understanding this is to think of a horse race. In a bookmakers, all
bets stop once the race starts. However, 'in running' means that bets
can still be made once they have started.
When spread betting on financial markets, it is possible to take positions both before and after the opening hours. Most markets can be traded from 7.30am until around 9pm GMT. This coincides with the closing of the New York stock exchange and NASDAQ.
(Please forgive us for the generalisations above. It isn't easy to explain this in writing and not make it so complex that it is impossible for the reader to follow.)
To read more about related topics, please follow these links:
Spread Betting Financial Markets For Beginners
Who Are The Main Spread Betting Companies?
3 Great Spread Betting Tips
How Easy Is Spread Betting Shares?
Spread Betting Forex Markets
FTSE Spread Betting Information For Beginners
What Spread Betting Software Should You Use?
How To Make Successful Financial Spread Bets