How spread betting and CFD trading work
What is spread betting
Like all forms of betting, spread betting involves putting up some money in the hope of getting more back in return. What makes spread betting unique is that the amount you win or lose keeps on growing the more 'right' or 'wrong' you are.
When you spread bet, the degree to which you're right or wrong determines your profit or loss.
To see how this works, let's start by considering a more traditional form of betting, like betting on horse racing.
You might be used to seeing bet prices or 'odds' such as 2/1 or 3/1 (two or three-to-one). This is known as fixed-odds betting, because the amount you stand to win or lose is fixed according to the odds of your horse winning. If you bet £10 on Red Rum at 2/1 and Red Rum comes in first, you'll win £20 (plus your original £10 stake back). If Red Rum doesn't win, you lose your £10 stake.
Now, what if you were betting not on whether Red Rum wins, but on the time it takes for him to complete the race?
You could do this as a spread bet, staking £1 for every second over three minutes that it takes for Red Rum to finish. This means if he goes on to run the race in three minutes 20 seconds, you would win £20. And for every additional second you would win another pound.
However the opposite is also true. If you're wrong and Red Rum finishes the race in less than three minutes, then for every second below three minutes you would lose a pound. So if he finishes in, say, two minutes 40 seconds, you would lose £20, and for every second slower you would lose another pound.
This - winning or losing more according to the degree to which you're right - is the essence of spread betting.
Financial spread betting
While you can spread bet on sporting events, and even on anything from the result of elections to fluctuations in house prices, by far the largest market in the UK centres around finance and the value of financial assets. These assets can be:
- Shares, like Apple or BP
- Currencies, like the euro (EUR) or US dollar (USD)
- Commodities, such as gold, oil or sugar
- Stock indices that track the performance of a group of shares, such as the FTSE 100, or Nikkei 225
- Other financial products such as interest rates, government bonds, options, etc
At any one time, each of these assets is worth a certain amount of money. This is its price or market value, and it changes over time.
Today one share of Apple might be worth $112, but tomorrow its value may have risen to $115. Similarly, one euro could be worth around 85p this week, but in two months' time it might have dropped to 80p.
Financial spread betting is simply betting on how the value of a financial asset will change in the future. In most cases, you're betting on whether it will rise or fall. If you think the price of the asset will go up, you 'buy' (also known as going long). If you think it will fall, you 'sell' (go short).
If the price moves the way you anticipate, then your profit will continue to grow the further it goes. However, if the market moves against you, your losses will increase as the price movement becomes greater.
Crucially, you never need to physically own the underlying asset. For example, you could speculate on the price of oil without actually having to own any oil. And as you're just betting on the direction oil will take, profits can potentially be made from the price either rising or falling in the underlying market.
- Spread betting involves speculating on an outcome, and the degree to which you're right or wrong determines the size of your profit or loss
- Financial spread betting involves speculating on price of a financial instrument
- The more the market moves in the direction you predict, the more your profit will grow. The more the market moves against you, the more your losses will increase
- If you believe a financial instrument's price is going to rise, you place a 'buy' bet. This is known as 'going long'. If you think its price is going to fall, you place a 'sell' bet. This is known as 'going short' or 'short selling'