Spread Betting explained
Spread betting is best explained using an example. Let’s say you want to trade indices and have spotted a trading opportunity in the Wall St index.
Trading on the Wall Street index
The Wall St index is currently trading at 20609.0 /20610.6
Spread bet prices are always quoted in pairs: the bid (sell price) and the offer (buy price). The difference between the two is known as the spread.
You think Trump's protectionist trade policies will benefit US stocks so you expect the Wall St Index to rise.
You decide to place a buy trade at £5 a point. This is known as going long and means that for every point the Wall St increases, you will make a profit of £5.
If it falls in value you will lose £5 per point.
Your margin requirement
As spread bets are a leveraged product you do not have to put down the whole value of the trade. Wall St's margin requirement is 5% which means you receive 20:1 leverage.
So if Wall St is trading at 20610.6 (Buy price) to place your trade you need a deposit of £5152.6, see the diagram below for how this is calculated.
The City Index platforms will automatically calculate the margin required to open the trade.
Remember, the higher the stake, the more money you need to deposit. You should always make sure that you have enough free equity in your account to sustain any losses and avoid being placed on margin call.
Good news: the Wall St index is up following the release of positive US economic data and the Wall St index rises as you predicted. The Wall St price is now 20666.0/20667.6
Having reached a comfortable level of profit, you decide to close out your position with a profit and you sell at 20666.0
Your spread bet profit
You bought at 20,610.6 and sold at 20,666.0 which represents a 55.4 point gain in your trade which, when multiplied by your £5 stake nets you a £277 tax-free profit*.
As this is a daily funded trade, you will incur a small overnight financing charge if you hold your position open overnight. For information about overnight financing charges, including when you will be charged from, visit the help and support section of our website.
Let's look at what would have happened if the Wall Street index had fallen instead.
Over the next two days, the Wall Street falls to 20581.6/20583.2, putting your spread bet into an open loss.
Deciding to take your loss, you now close your trade at the new sell price of 20581.6 This represents a 29-point loss which, when multiplied by your £5 stake, leaves you with a £145 loss.
Let's say that after you exited your buy position, you suspect the Wall Street index will drop further. After doing further analysis, you re-enter the market but decide to ‘go short' by entering a sell position at 20570.0 with a stake size of £5. You set a stop loss 90 points above at 20660.0 and a limit order 90 points below the sell level at 20480.0.
You check your position on your smartphone some hours later. The Wall Street now has a value of 20475.0/204576.6. Your limit order was hit at 20480, so your position has been closed out with a 90-point gain, which when multiplied by your £5 stake, leaves you with a £450 profit.
Suppose that the Wall St Index had risen instead.
Some hours after placing your trade you check and see that the Wall Street has risen significantly. Thankfully you had your stop loss in place which cut your losses at 20,660.0. This would result in a £450 loss on your position.