How to spread bet
How to place a spread bet
Placing a spread bet is a relatively simple process - the complexity comes from researching the relevant markets and knowing which way to bet.
You will be quoted two figures - the bid and the offer price otherwise known as the ‘ask’ price. The bid is always the lower of these two numbers.
The difference between the bid and the offer is known as the spread, this is where the name spread betting is derived from.
Ideally, you want a tight spread (the difference between buy and sell prices) as this means less price movement is required in order for you to make a profit - or a loss if the market moves against you.
So, if you believe the financial instrument in question is going to rise in value, you would 'buy' at the offer or ask price, while you would 'sell' at the bid price if you think the underlying asset will depreciate in value.
The next thing you have to do is decide how much you would like to bet per point or penny of movement. You can therefore increase your leverage by betting a higher amount.
Once you have decided to open a position, you just need to work out how much the margin requirement will be - and ensure you have enough in your account to cover this.
Spread betting examples
When you spread bet, you can choose to take a long or short position. This has nothing to do with the length of time you let your bet run for - it refers to whether you decide to buy or sell the instrument in question.
Here are some spread betting examples; we'll start with a long trade:
If you feel that the market value of a particular instrument will rise, you would go long. This means you 'buy' at the offer price with the aim of 'selling' it at a later date once its value has climbed to realise a profit.
We'll use Vodafone in this instance.
You are offered a spread of 177p - 178p by ETX Capital
You believe the share price will climb, so you decide to 'buy' at the offer price of 178p and you bet £5 per point that it moves above this.
By the end of the trading day, Vodafone stocks have risen and are now trading at 189p - 190p, so you decide to close the position by 'selling' at the bid price of 189p.
Your profit is calculated as follows:
189p - 178p = 11p x £5 = £55 (Close Price – Open Price = Difference x Stake = P/L).
Before you place the bet, you need to ensure you meet the margin requirement set down by ETX Capital. You work this out by multiplying the total trade consideration by the margin percentage.
So, in this example the total trade consideration would be £890 (178p x £5). If the margin is five per cent, your margin requirement would be £890 x 5 per cent = £44.50. This is the amount required to open the trade and is subject to increase / decrease as the position moves in your favour or against you.
You must remember that had the value of the Vodafone shares fallen, you would have lost £5 for every penny it dropped lower.
Now we'll work out an example of a short trade, again using Vodafone shares.
If you decide to go short, you expect the share price to drop in value, so you would 'sell' at the bid price with the intention of 'buying' at a later date when the stock is cheaper.
Vodafone shares are now being offered with a spread of 192p - 193p and you believe the price will fall.
You decide to 'sell' at the bid price of 192p and you once again bet £5 per penny that the value moves lower than this.
By the end of the day, there has been little movement in Vodafone shares, so you decide to leave the position open overnight.
This continues for three days until Vodafone's share price does indeed fall. You are now offered a spread of 178p - 179p.
You decide to close the position by 'buying' at the offer price of 179p.
Your profit would be worked out as follows:
192p - 179p = 13p x £5 = £65
However, because you left the position open for three days, you need to calculate your rollover costs and deduct these from your profit.
You take the total trade consideration (£960) and multiply it by the overnight financing rate (2.5 per cent + the LIBOR (average interest rate for lending) rate - we'll call that one per cent for this example). This is then divided by 365 and multiplied by the number of days you held the position (three).
So: £960 x 3.5 per cent = £33.6 / 365 x 3 = £0.28
Therefore, your total profit is £65 - £0.28 = £64.72
2.5 per cent + the LIBOR (average interest rate for lending) – the funding rate is 2.5% +/- Libor depending on whether you are long or short. In the above example the client sells – so funding should be 2.5% - 1% £960 x 1.5% = £14.4 / 365 £0.04 x3 = £0.12
Had the Vodafone shares risen further, you would have incurred a loss and if you had left the position open overnight in the hope of a change in the market, you would need to add the rollover costs to your deficit. These examples are for illustrative purposes.
Spread betting risk management tools
If you are concerned about the risks involved with spread betting and want to limit the level of your losses, you need to make use of the risk management tools available.
Stop loss and limit orders are among the most common options used by traders. The former allows you to automatically close a bet when the markets have moved against you and the price hits a pre-determined level. Not all stop losses are guaranteed.
Limit orders can be used either to help restrict losses or to lock in profits. They are an order to buy or sell an instrument when it hits a pre-set price.
Other tools include ‘one cancels the other’,’ good till cancelled’,’ good for the day orders’ and ‘if done orders’. You should formulate a risk management strategy when you begin trading and make use of the most appropriate options.
Spread betting with ETX Capital
ETX Capital provides support to all of its spread betting clients, in the form of a knowledgeable customer service team, seminars, webcasts and online tutorials. Each client is allocated their own dedicated account manager.
If you are new to spread betting, we can help you learn how to spread bet on global markets, while offering a comprehensive range of market analysis and providing you free new and innovative trade through charts which will appeal to established investors and new spread traders alike.
Other reasons to spread bet with ETX Capital include the tight-dealing spreads we offer and our low margin requirements (these are typically between 2%-10%. FX margins are typically 0.75%-2%). We also operate a minimum bet size of just 50p on selected markets.
It couldn’t be any easier to start trading with ETX Capital, having recently been recognised as being the best in market for ease of account opening by Investment Trends research (2011)
ETX Capital is a trading name of Monecor (London) Ltd, which is Authorised and regulated by the Financial Services Authority and is a member firm of the London Stock Exchange.