How does spread betting work?
Spread betting involves taking a position, a bit like with a sports bet, on whether something will be higher or lower than the ‘spread’ offered by a spread betting company. (It is not the same as physically buying or selling any shares, which enables significant advantages to normal stock market investments - see Why spread bet for more info.) A spread bet is essentially a simple derivative.
For example, a spread trading company might offer the spread 5500-5505 on the daily FTSE100. This means that you can either buy (go long) the spread at 5505, or sell (go short) the spread at 5500. You then need to decide how much you would like to ‘bet’ per point movement in the FTSE. This is known as the ‘stake’.
Buying the spread for £1 at 5505 means that for every point the FTSE finishes above 5505 you make £1. So if the FTSE finishes at 5555, then you make £50. However if the FTSE finishes at 5455, then you lose £50.
Selling the spread for £1 at 5500, means that for every point the FTSE finishes below 5500,you make £1. So this time, if the FTSE finishes at 5455, then you make £50, however if the FTSE finishes at 5555, then you lose £50.
There are two additional factors that you should be aware of, firstly, spread betting companies need to make some money and they do this via the spread. You will therefore be offered two prices a buy and a sell, learn more about the spread here. Secondly, the broker will require some security or a deposit to make sure you don't walk away from a losing bet. The lower the deposit and lower the spread the better it is for you, compare spread betting deposits and margins here.
That is the basic essence of how a spread bet works, however, there are number of things you need to understand before you start spreadbetting yourself.