The Life-Cycle of a Spread Betting/CFD Trade

The Basics

Spread betting companies quote a two way price known as the spread that consists of a bid and offer price (or sell and buy price). Basically, you can bet on the price going down (known as going short) or up (known as going long).

When placing your bet, you need to determine the length of time you would like the bet to run. This can vary widely from just one day, a specific month and even till year end. However, the dynamic nature of spread betting means that it generally favours short to mid-term speculators because of the cost of financing a long term trade can get expensive (refer to section on financing charges for further explanation).

All spread bets have an expiry date which is when your bet is automatically closed, and the last dealing date, which is the last date possible that you can close out of a trade before it expires. Of course, with spread betting you can close out of a trade anytime before the last dealing date.

Choice of Trades

Spread betting firms offer a wide range of markets to speculate on from financial instruments, such as equities and bonds to the outcome of sports matches. Generally, however, most spread betting firms focus on trading financial instruments. A spread betting platform will feature a search function that allows you to view the different instruments available to trade.

Spread betting uses leverage in order to maximize returns, so make sure you have a clear understanding of the downside risks, it is very important that you carefully study the financial instrument you are trading in before placing your order. Get an understanding of the volatility of the price moves over time, through use of charts and intra-day high/low price date.

Placing an Order

Once you have decided which financial instrument you wish to speculate on, and have calculated your downside risk, you can go long or short by either buying/selling at the current market price otherwise if you have a specific entry price than you can place an order to execute a trade when the bid / offer price reaches a particular value in the future.

Margin Call

Spread betting trades on margin which means that you must place a cash deposit with the broker (spread betting firm) that is a percentage of the amount that you wish to trade as collateral for any losses you incur from that trade. This is calculated by differently by each spread betting firm and will differ depending on the volatility and nature of the spreads traded.

In the event of an adverse price movement against your account, the broker can issue a margin call requiring you to place more funds into the account to cover the losses that you are incurring. This is done to protect the brokerage from taking a too large hit from the price drop and to allow you to continue to keep your bet open. If the call is not met, brokerages are entitled to automatically close out your trade and possibly your account.

Opening and Closing a Trade

Example

The spread betting agent offers you a spread on the FTSE 100 at 4200 – 4202. You go “short” (predicting a price decrease) and open the trade by selling at the bid price of 4200, placing £1 per point. The price does fall and the new spread is 4148 – 4150. You decide to pocket the £50 profit by closing out the trade at 4150 offer, which is £1 x (4200-4150). Going long and short and understanding which price you are paying in terms of bid(buy)/offer(sell), can be confusing for beginners, but the table below should try to explain the relationship.

OFFER (SELL) = Where the counterparty are willing to sell to you
BID (BUY) = Where the counterparty are willing to buy from you

How it works?

Regardless of the type of spread betting transaction you are undertaking (sports or financial), you will abide by the same basic principles when it comes to the process of buying and selling.

So how does spread betting work?

Let’s look at spread betting in the realm of company shares for this example.

Basically it all starts when the spread betting firm quotes a betting spreads on their estimate for the outlook on a share.

As the spread better, you then decide on whether you think the quoted price is likely to be higher or lower. You spend time studying the betting spreads and decide whether or not there is a spread betting option there for you.

To rewind for a minute here and put the whole concept of spread betting into perspective quickly first – this will help you to get betting spreads and spread betting specifics firm in your mind.

Think about the process when you originally approach your stockbroker if you’re seeking to buy shares you will get two prices given to you.

  1. The Bid price – this will be the lower of the two prices and you will likely get this if you are selling the shares
  2. The Offer price – this is the higher of the two prices and this is what you will pay if you are buying shares.

The difference between the Bid price and the Offer price is known as a “spread”. This is why we say we’re “betting spreads” when we are spread betting.

Following?

Okay back to our example on how spread betting all works.

So when it comes time to hedge your bets on betting spreads in the world of spread betting, you will sell your bet at the Bid price if you think the share is likely to lose ground.

If you think the share is likely to gain ground, you buy at the offer price.

This is the crux of spread betting right here.

Now the fun begins!

At placing your spread betting bet you now need to decide what your wager will be. Make sure you spend some time considering the betting spreads here first – due diligence wins the race when you are starting out in spread betting.

You can wager your spread betting on a per-penny/cent basis or a per point basis, but keep in mind, if you bet on a share on a per cent basis at $1 you will win or lose $1 every single time the share goes up or down by a cent.

This could mean great wins if the share price soars, but it can also mean serious losses if the price takes a tumble.

The trick is to make modest bets when you’re first starting out in the spread betting game. Betting spreads is complicated – learn the ropes first, do a couple of small spread betting trials before you really get into the swing of it.

Let’s look at a Buy and Sell example so we can put it all into perspective.

For the purpose of this example let’s say you are betting spreads on the S&P ASX 100.

Times are tough and you are hedging your bets on the S&P ASX 100  in the near future due to poor employment statistics and slumping retail sales Down Under.

BUY

The Australian economy seems to be gaining strength, and you are heading your bets on the S&P ASX 100 gaining ground in the near future due to strong export sales out of the country.

You buy the S&P ASX 100 at 3601 and bet at £3 per gain point.

Each time the S&P ASX 100 gain a point you make £3, but alas, every time the S&P ASX 100 loses a point, you lose £3.

SELL

Times are tough and you are hedging your bets on the S&P ASX 100 falling in the near future due to poor employment statistics and slumping retail sales Down Under.

You sell the S&P ASX 100 at 3601 and bet £3 per loss point.

Each time the S&P ASX 100 loses a point you make £3, but alas, every time the S&P ASX 100 gains a point, you lose £3.

Worried about how much you could lose?

Never fear, you can choose to place a “stop loss” on your spread betting account so that, when your losses reach a certain value your bet is cancelled and you can lose no more.

There is no doubt that betting spreads is risky. You need to ensure you are willing to suffer losses as well as welcome in gains.

But with some practice and industry knowledge spread betting could be a very lucrative option for you .

Good luck!


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