One of the differences between spread betting and regular trading is that when it comes to spread betting traders are not buying the actual product in question. Instead, they are trading based on the underlying movement of that particular market, with their original trading parameters depending on the size of the spread.
For example, let’s say I decide to trade Microsoft. Microsoft stock is currently trading at a bid/ask price of 4528.1/4536.9.
This means that if I decide to sell, or ‘short’ Microsoft stock, the level at which I will be shorting at will be 4528.1. If I instead decide to buy or ‘go long on’ Microsoft stock, the level at which I will be going long will be 4536.9. However, remember that with spread betting the original trade is not based on the actual price of the shares, but is rather based on the spread itself, which is the difference between the quoted buy and sell prices. In our example, the difference between 4528.1 and 4536.9 is 8.8; therefore 8.8 is the size of the spread.
I then have to decide how much I want to trade per point. If, for example, I decide to trade at £1 per point, buying at that 4536.9 level, then I will start off with a deficit of £8.80. I will then need the sell price for the stock, which is currently at 4528.1, to rise beyond 8.8 points to a level of 4537 or above in order to make a profit.
Let’s say that the market subsequently rose and the sell price for Microsoft stock is now 4541.7. If I decide to sell at this level, I will make a profit of £4.80, since the level I sold at, having moved upwards by 13.6 points, is now 4.8 points above the level at which I bought. If, however, Microsoft’s stock price falls and the sell price is now 4523.3, were I to exit the trade at this point I would lose my original £8.80 plus an extra £4.80, since the sell price is now 13.6 points below the price I purchased at.