Unlike traditional share-dealing, you never own the actual share or commodity. You are simply making a call on whether you think it will go up or down in value. You stake a certain amount of money per point movement – the more it moves in your favour the more money you make, the more it moves against your prediction, the more you lose.
The spread is the difference between the price you can buy at and the price you can sell at. You will buy at the higher price if you think the market will rise (Go Long), or sell at the lower price if you think the market will fall (Go Short). The tighter the spread, the smaller the market has to move for you to make a profit.
Select your market
Let’s take an individual share e.g. Tesco. See a Spread Betting example in the right hand column of this page.
Check the price quoted by the spread betting company
It will reflect the actual share price. There will be always be two figures – the sell price and the buy price, the sell price will be lower. For example, it could be 749-751.
You must decide if you think the price of Tesco shares will go up higher than the buy price, or fall lower than the sell price. If you think higher, you “buy” at the buy price, if you think lower you “sell” at the sell price.
Decide your stake
Now, you must decide how much you are betting, that is, what your stake is – this is the amount of money you gain or lose per point of movement on the value of the share. It is always expressed in currency per point of movement e.g. £5 per point.
In spread betting you do not have to pay the full cost of what the share would be to buy – You will only have to pay a percentage – this is called trading on margin. But spread betting companies will require you to have a certain amount on deposit to cover potential losses (exactly how much varies from company to company and this figure is often called the Initial Margin Requirement).
When you buy to open your trade, you must buy at the higher price, and when you close that trade, you must close at the lower price being quoted at the time you close.
If you sell to open your trade, you sell at the lower price, and when you close the trade, you must close at the higher price quoted at the time.
Close your trade
You can close a trade at any time whether you are making a profit or a loss. You do not have to meet any specific value on any specific date.