Spread Betting: How Does it Work?

I’ll be the first to admit, here and elsewhere, that I’m not an investing savvy person.  I know just enough to get myself into trouble.  One of the new terms that I’ve learned just recently is Spread Betting.  Now, most anything that I’ve ever dealt with that involved the words spread and betting involved bookies, Super Bowls, and point spreads of more than a field goal.  So, when I heard the term used in a financial sense, I had to go and do a little research to see what it was all about.  And, like anything else, financially, that I research, I had to share it with you, the readers!

What is Spread Betting?

DSCN1753Spread betting, in a financial sense, is betting on the markets based on how you feel they will perform.  If you think the markets will go up, you bet on them going up (go long).  If you believe they will go down, you bet on them going down (go short).  The betting itself is pretty simple.  You simply place your bet (going up or down), and then wait to see where the markets go.  After you’ve placed your bet, you can close it to claim your winnings.

How to Spread Bet.

This can probably be best described by example.  Let’s assume that we’re going to make a bet on an index.  It can be the NASDAQ, S&P, or whatever.  We feel that it’s going to go up based on recent news.  So, we decide to go long, and bet on the index to rise.  We place a long bet.  If the stock rises, so does our profit.  The profit (or loss) is based on the spread.  If the index starts at 100 (an example), and we go long, and it rises to 200, the spread would be 100.  If we close the bet at 200, our bet is multiplied by the spread.  If we had bet $1, we would have made $100.

Risks of Spread Betting.

As you can probably imagine, anything with the term betting in it’s name has a risky side to it.  Much like our bet would be multiplied by the spread in the winning scenario above, so too would they be multiplied by the spread if we’re wrong.  If we had been wrong, and the index had dropped by 100 points, we would have lost $100.  To some degree, this can be mediated by using a stop order that will automatically close the bet should it drop (or rise, if we bet on a drop) past a certain point.  While a stop order can minimize your loss, it doesn’t remove the risk entirely.  There’s still potential for some pretty damaging losses should you be wrong often.

Is Spread Betting for you?

I’m not financial adviser, but if I were, I’d say that spread betting is something better left to those who know what they are doing.  I’m not one of those people, and until you are, you probably should avoid it.  On the other hand, if you’re a seasoned trader of the financial stock markets, and feel like you’ve got a good feel for what they are going to do on any given day, maybe it’s something you’ll want to try.  I can’t say either way.  What I can say, is that with anything that’s related to your finances, there’s no excuse for not knowing.  If you don’t know what you’re getting into, you shouldn’t get into it.  Do your research, learn the tactics and methods, and then give it a try.

photo credit: Perpetualtourist2000