A spread bet is a bet around a prediction of a future result or price made by a bookmaker or bookrunner. The best way to fully understand how spread betting works is to go through some of the basic examples you will find contained in spreadbettingexplained.com until you feel completely comfortable with the concept. Some spread betting companies actually offer a dummy trading facility which enables you to take "practice bets" and see your actual results without taking a "live" bet and in some cases they even offer prizes for successful punters. We believe this is a very sensible approach, as it is of upmost importance that the risks involved with spread betting are fully understood before trading begins.
Remember as quoted in a number of national papers, "spread betting can seriously damage your wealth if events go against you".
Now onto the history and basics of spread betting.
Spread betting has been around for many years but mostly it was concentrated around the "Square Mile" in the City of London. Many of the bookrunners were individuals working on the old stock exchange floor and the bets tended to be mainly placed on sporting events, particularly cricket and rugby scores.
Today the main bookrunners are professional bookrunning firms or bookmakers although there are of course individuals who still make prices. Over the last few years spread betting has become the fastest growth area within the betting industry. Financial spread betting has taken off and the number of products that you can bet on is growing at a rapid pace.
The name spread betting evolved from the actual spread (width) between the bid price (the lower price which one sells at) and the offer price (the higher price which one buys at). This spread is also the margin the bookmaker or bookrunner hopes to make their profit from. Understanding this concept is of prime importance when you are spread betting.
You also need to understand a couple of points on buying and selling. When you buy something, with a view to selling it at a later date, you buy something that you don't yet own, and you know that you will have to sell it at some point in the future. This is called going 'long'.
The reverse is to sell something, with a view to buying it back at a later date. This is called 'shorting' or going 'short'. It is vital to understand this concept of selling something which you don't yet own.
Let's look at a simple example of a sporting spread bet made by Mr A on the number of yellow cards (bookings) in a particular football match. The price set by the bookmaker or bookrunner for yellow cards in this match is 4 - 5.
This means that if Mr A thinks that there will be more than 5 yellow cards, he should bet by going long at 5, ie he should buy, which he can only do at the higher price (5).
But if he thinks that there will be fewer than 4 yellow cars, he should bet by going short at 4, ie he should sell, which he can only do at the lower price (4).
Mr A actually believes that there will be more than 5 yellow cards and decides to stake £5. So he goes long £5 at 5. This means that every yellow card in excess of 5 will result in a profit of £5, but every yellow card less than 5 would result in a loss of £5.
Remember: The stake money in spread betting is the amount of money risked for point movement. In this example, one yellow card. If Mr A had gone long at 5 and the number of yellow cards was 5, he would neither win nor lose. If Mr A had gone short at 4 and the number of yellow cards was 4, he would neither win nor lose.
Consider two possible outcomes to the match:-
Example 1
Mr A thinks there will be more than 5 yellow cards so buys £5 at 5.
If at the end of the match the number of yellow cards were 7. So the profit or loss is calculated by:
|
Profit |
||||||||||
|
|
||||||||||
|
Price is 4 - 5 |
||||||||||
|
Mr A goes long £5 at 5 |
||||||||||
|
Total No. of yellow cards awarded |
7 |
|||||||||
|
Less (buying price) |
5 |
|||||||||
|
Difference |
+2 |
|||||||||
|
|
||||||||||
|
The stake price £5, x the difference, +2 |
=£10 profit |
|||||||||
If at the end of the match the number of yellow cards were 3. So the profit or loss is calculated by:
|
Loss |
||||||||||
|
|
||||||||||
|
Price is 4 - 5 |
||||||||||
|
Mr A goes long £5 at 5 |
||||||||||
|
Total No. of yellow cards awarded |
3 |
|||||||||
|
Less (buying price) |
5 |
|||||||||
|
Difference |
-2 |
|||||||||
|
|
||||||||||
|
The stake price £5, x the difference, -2 |
=£10 loss |
|||||||||
Another key factor to remember with spread betting is that the bet remains "live" to its completion. This means that you can check the price of your bet right up to the result or make up time and take a profit or a loss any time beforehand if you want to.
Let's look at another example to show how this works.
Example 2
A cricket test match England v. South Africa at Lords.
England is about to bat and the quote for England runs in the first innings is 190-200.
Say Mr B thinks England are unlikely to score 190 he therefore can sell runs at the lower score (190).
He sells £5 (the stake price) at 190 (runs) or goes short £5 at 190.
|
Profit |
||||||||||
|
|
||||||||||
|
Price is 190 - 200 |
||||||||||
|
Mr B goes short £5 at 190 |
||||||||||
|
|
||||||||||
|
Total No. of runs scored |
165 |
|||||||||
|
Less (seling price) |
190 |
|||||||||
|
Difference |
+25 |
|||||||||
|
|
||||||||||
|
The stake price £5, x the difference, +25 |
=£125 profit |
|||||||||
|
Loss |
||||||||||
|
|
||||||||||
|
Price is 190 - 200 |
||||||||||
|
Mr B goes short £5 at 190 |
||||||||||
|
|
||||||||||
|
Total No. of runs scored |
230 |
|||||||||
|
Less (seling price) |
190 |
|||||||||
|
Difference |
-40 |
|||||||||
|
|
||||||||||
|
The stake price £5, x the difference, -40 |
=£200 loss |
|||||||||
Although in Example 1 we have a result of 165 all out let's see how the "live" price changes. England after 12 overs are 50 runs without loss and the price is now 220-230 for the 1st Innings. This change has reflected the good start by the England Team. Mr B could take his loss by buying back his short (sold) position at 230 (remember he has to buy at the higher price).
So if he did this, the result would be:
|
Loss |
||||||||||
|
|
||||||||||
|
Price is 220-230 |
||||||||||
|
Mr B sold |
£5 at 190 |
|||||||||
|
Later Mr B buys |
£5 at 230 |
|||||||||
|
|
||||||||||
|
Difference -40 x £5 |
=£200 loss |
|||||||||
But Mr B decides to keep his bet going and England have a very poor period and lose 5 wickets for only 30 more runs. So the score now is 80 for 5. The live price reflects this and now is down to 150-160. Mr B could now decide to take his profit by buying at 160.
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Remember you can deal in part of your position taking profit or loss on say 50% of any amount if you would like whenever you want. But Mr B keeps to his original position and ends up with a profit of £125.
|
Profit |
||||||||||
|
|
||||||||||
|
Mr B sold |
£5 at 190 |
|||||||||
|
Result all out |
165 runs |
|||||||||
|
|
||||||||||
|
Difference |
+25 |
|||||||||
|
Result +25 x £5 |
= £125 profit |
|||||||||
|
|
||||||||||
Financial Spread Betting
This offers an alternative to dealing in the traditional way in stock markets, fixed income markets, currency markets and commodity markets. What a financial spread bet does is predict the price of a stated instrument or product at a specified time in the future.
There are a huge number of types of financial spread bets and the time period can vary from "day" bets (which cover a certain period in our day, normally the market hours of a particular instrument) to much longer periods. Remember it is important to be clear of the terms and conditions before making any spread bet. Always check and be clear about the expiry date and time of expiry on that date of any spread bet. (These may vary from company to company). Once you decide which instrument you would like to trade in you just need to call or request for on-line systems for a quote. Then you can make your bet.
Remember the normal principal still works, if you want to sell something then you sell at the bid price (the lower price) and if you want to buy something you buy at the offered price (the higher price). Never forget this rule, as it is the same for all spread bets.
The types of spread bets available are also increasing all the time as the spread betting companies compete for business. Listed here are most of the straightforward types of spread bets with working examples. With some of the new and more complicated types of spread betting we recommend an extra cautious approach. Make sure you are confident with the more straightforward type of spread betting before trying any of these. Remember any misunderstanding could result in large losses so once again we recommend paper trading (practice trading) first.
Setting Up a Spread Betting Account
Setting up a spread betting account is a very simple process and in most cases will only take 2 or 3 days.
A normal account will expect you to deposit a sum of money (margin) that will cover basically any bets in progress. If your current bets start to go against you, you will be called upon to deposit more money (margin) to cover the potential losses.
Credit accounts are available and they are generally offered on an individual basis, the amount of credit given governed by your own particular circumstances. As soon as the account is set up you may begin trading.
Copyright 2000 everythingexplained.com for spreadbettingexplained.com