What is the Spread?

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What is the Spread?

The spread is a market feature most commonly associated with the financial spread betting, Forex and sports spread betting markets.  Basically, the spread is the difference between the offer (buy) and bid (sell) price offered by a broker.  The spread is how the broker charges their commission and the size of it can vary between different brokers and financial markets.

Introduction to Financial Spread Betting

Financial spread betting is a form of investing and trading that allows you to make money speculating on a range of financial markets such as global indices, the FTSE 100, commodities, securities, interest rates, indices, currencies and stock exchanges.

Spread betting is very different to regular CFD trading.  Unlike stock broking or share trading where you would need to visit your stock broker in order to place an order, spread betting can be done through a FSA-regulated spread betting company where you would buy and sell based on the “bid” and “offer” prices quoted given to you.

In order to wager money on a stock or indices going up or down you need a wager a fixed amount per point.  At most spread betting companies such as Capital Spreads this starts from £1 per point.  The amount at which you win or lose will subsequently depend on your stake size x the stock movement.

If you buy a trade at £10 per point and it increases 10 points from 130p up to 140p for then you would earn a £100 profit.  On the other hand, if the stock decreased 10 points after a day than you’d lose £100.  The good thing about spread betting is that you only need to deposit a fraction of your total trade value – this is known as the deposit margin or Minimum Initial Margin Requirement (Min IMR).

Opening and Closing a Trade in Spread Betting

In order to open a bet or trade in spread betting you need to have a real account.  Once you’ve done this, you can select any of the global markets or indices to place a bet on.  You’ll see two different prices for each stock – the bid (sell) price and the offer (buy) price.  For example, Gold will be quoted $1,200 – $1205.  The lower price is the bid price and the higher quote is the offer price.

If you think the price of gold will increase over the next 24 hours than you would buy at the higher price and sell it for a profit based on your stake size x point movements.  If you think the price will decrease then you can short-sell it based on the lower price.

The different between these two quotes for gold is known as the spread.  In this example the spread (1200 – 1205) is 5 points.  The spread is how the broker makes their money since on average 50% of trades will be won and loss.  Unlike your typical bookie such as Bet365, the odds or real prices are not inflated in order for the bookie to earn money.  Instead the spread betting broker earns from the “spread” which is a fixed amount.

How to Calculate the Size of the Spread?

The size of the spread differs between different markets so you will need to view the spread betting firms market information and tables to see the size of the spread for each market.  The tighter the spread, the more profit you will make since this increases your profit margin for each trade.

Capital Spreads is one of the best UK spread betting firms in my pinion and offers incredibly tight spreads of just 1 point on the FTSE 100 and UK Rolling Daily/Futures.  You can also trade from just 2 points on the EU/USD Forex and 1 point on a range of global shares markets such as DAX, Nikkei and the S&P 500.

Video Explaining the Spread in Spread Betting



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