If you are talking about spread betting on stocks and shares, then the way it works is that you trade on the spread between the buying and selling price. An example is the best way to understand it. If you were to trade say BP Shares, which are trading around 680p, then the spread trading platform will give you two prices thus : 679-681. The spread here is 2 points. If you think that BP is going to go up, then you can buy at a price of 681p. If you think it is going down, you can sell at 679p. In other words, if you were to buy and sell instantly, you will lose 2p.
In reality spread betting firms place minimum amounts you can bet, so you would have to bet a minimum of 50p per point.
Now if you had betted on BP to go up at 50p a point, and if BP goes up to 690 (in the example above) you would make a profit of £4.50 (690 minus 681 X 50p).
On the other hand if BP fell to 675, assuming you had bought, then you would lose £3.00 (50p buy at 781).
The advantage of spread betting is that it allows for greater leverage. For a small amount you can get full benefit of the move in the share price. Secondly, with spread betting you can short as well as go long. Shorting is where you think prices are going down. You can trade and make money when prices are falling. Often people who hold lots of shares, go short on spread betting because if stock prices go down, they will lose on their share purchases but make a profit on their spreadbetting thus reducing their risk.
Spread betting is very risky esp where stocks are very volatile. Most spread betting platforms allow you to place "Stops" at a certain point where if the stock price reaches that point, the deal is completed automatically. This way you loss is limited. Spread betting is considered gambling so any profits are not taxed.
Originally posted by 4Money Editor: Check out our new spread betting guide. Ed
Editor, although informative, I feel your guide doesn't emphasize enough the risks involved.
this is very true plenty of people have gone bankrupt through spread betting as it is a very volitile form of gambling.if you go into it without fully being aware of your liabilities then you can be in for a very bad shock.
