Frequently Asked Spread Betting Questions
Is spread betting risky?
Spread betting can be extremely risky especially when it is not fully understood. While depositing for bonuses and offers may sound highly attractive, we strongly advise that you familiarise yourself with stop losses and other risk management strategies.
Is spread betting gambling?
While for most spread betting is recreational, there are professional spread bettors who make a living from spread betting. Spread betting is not taxed and there are no transaction fees apart from the cost of the ‘spread’ – this makes spread betting a very viable option to experienced traders however there is a degree of luck nvolved.
Is there a minimum amount you need to invest?
You can put as much or as little in your account as you want but you need to have enough in there to cover any possible losses.
Say if the shares are priced at 53p OFFER.
You buy £5 per point at 53p share price.
So you make £5 for every point the price goes above 53p, right?
A point is a unit decided by the spreadbetting company, and you bet ‘per point’. A point might be 1 penny for a stock. So if you bet £5 per point, for every penny that stock moves up or down you make or loose £5. For forex, a certain currency pair might have 0.001 as 1 point. So if you bet £2 per point and you go long at 1.418 and the price moves to 1.420, it has moved 2 points. Because you have bet £2 per point you will then have £4 profit. You should always be sure what defines 1 point in whatever you are trading so you know what size stake you should put on…
In your example above a point would be 1p. So for every 1p the price moves upwards you will make £5. But you can’t buy at the bid price and sell at offer price immediately for profit. You buy at the offered price and sell a the bid price. This means that any trade opened will be at a loss. The price will need to move in your favour for any profit to be made. In your example, if the price has move 3p in your favour and you were £5 per point you’ll have made £15 profit.
I’ll give you another example. Tesco is currently 347.7 sell/bid and 348.5 buy/offer. 1 Point is 1p. If you think price is going to rise you’ll go long (buy). You need a strategy that has a statistical edge to make a decision like this. If you just guess you’ll lose all your money. Anyway, you buy at 348.5 £10 per point. If you were to sell immediately, the sell price is 347.7 so you’d be selling at a 0.8 point loss, which would be £8 loss. So you need the price to move in your favour. Now lets say you buy at 348.5 and the Tesco stock moves in your favour. Price moves to 362.3 sell/363.1 buy and you decide to take your profit. You sell at 362.3. Total move is 13.8 points. Since you were £10 per point thats £138 profit. On the other hand if the price went down 13.8 points while you were long you’d have lost £138.
How does margin trading work?
Let’s take the case of a Tesco spreadbet. In the Tesco example where you buy at 348.5 £10 per point. The most you could lose is 348.5 x 10 = £3485 But you don’t need £3485 in your account to open the trade.
There will be a margin factor for every instrument you trade. For Tesco this is 10% of your total exposure. Your total exposure is £3485 so you need £348.50 in your account to trade Tesco at £10 per point. You can use a stop loss to reduce your total exposure. For example, if you place a stop loss on your Tesco trade at 328.5, your exposure is reduced because you are only risking a 20 point loss (£200 at £10 per point). The more you reduce your exposure by using stop losses the more trades you can have open simultaneously up until you are using up all of your margin, but that isn’t recommended as if your losses become too big you’ll receive a margin call telling you to deposit more capital. If you don’t, I think they can close the positions on your behalf.
You kind of have the right idea, you basically work out what you are risking and make sure you have enough in there to cover it. Use stop losses to reduce your risk. As a guide you should only risk about 2% of your capital per trade. For example, if you have £2000 in your spread betting account, you shouldn’t risk more than £40 (2% of £2000). If I was using this money management on the Tesco trade, buy at 348.5 I would set a stop loss 4 points away at 344.5. If the price moves 4 points against me I’ll be stopped out for a £40 loss. However, its normally easier to work it out the other way around. I.e. Work out where to enter and place a stop loss first. Then divide 2% of your capital (£40 in this case) between the number of points between entry price and stop loss to work out how many £ per point you should trade. For example, you want to go long Tesco at 350, you want to place your stop loss at 340 (because your technical analysis indicates this), therefore you are risking 10 points on the trade. 2% of your £2000 capital is £40. Divide £40 by 10 points. Thats £4 so you would enter your stake as £4 per point.
How much can I lose when spread betting?
While every platform will warn you of possible losses, it can never be made clear enough. You can lose more than your initial deposit when spread betting. When you open a position and realise losses that go beyond your bank balance you are under an obligation to pay back these losses. While you may have a large enough balance to meet the margin requirements, a bad trade with no stop loss is a sure fire way to end up in serious debt.
So no shares are actually bought or sold…and…
Its just a “bet” with the spreadbetting company?
Yes no shares are bought or sold, its just a bet on price movement. The cost of the spread bet is in the spread correct, also if you hold a trade overnight you’ll pay a bit but not much. Depends whether its spot or futures. Anyway, I’m tired of answering questions now. Get a book!