Spread betting is a derivatives type of product that allows investors to trade on the price movements of many subjects including stock market indices, shares, commodities and currencies.
The nature of spread betting allows investors to profit whether their tracked subject falls or increases in value – depending on whether they have got the ‘long call’ (rise in value) or ‘short call’ (fall in value) correct.
For example, an investor may wish to place a spread bet on the FTSE 100 – a spread betting company will then offer an investor a bid (selling) and offer price (purchase price). For example, the FTSE 100 may be trading at 6500 and the spread betting firm may offer an investor a bid price of 6498 and offer price of 6502.
Should an investor believe the FTSE 100 will rise, they can take a long position and buy for £5 point (as an example) – for every point the index rises, the investor will earn £5. Although if the index actually falls during the agreed period, then an investor will lose £5 per point. Should the index suffer a 100 point fall, then the investor would have lost £500 if they issued a long call.
Moreover, it is worth understanding that spread betting relies on the concept of leverage. While this enables an investor to avoid putting up the full value of their position to trade, it can also amplify losses if the index or tracked subject moves against them. Therefore an investor can lose more than their deposit (also known as margin).