Spread betting enables you to speculate on the movement of a particular asset – like a currency pair, company stock or even an entire index – without actually owning the asset.
It differs from alternatives such as fixed-odds betting, because the size of your profit or loss is based on how much your chosen market moves. With fixed-odds betting, you have a simple win/lose outcome and a pre-defined payout or loss.
When financial spread betting, the outcome you're speculating on is the direction in which the price of a financial instrument will move. If it moves the way you predict, your profit will grow the further it goes. However, if the market moves against you, your loss will also increase as the price movement becomes greater. Betting on the price increasing is referred to as going long, while betting that it will decrease is called going short (or ‘shorting’).
Spread betting on shares example
Say Apple is trading with a sell price of 135.05 and a buy price of 135.20. You anticipate that Apple shares are going to rise in the next few days due to a new product release tomorrow. You decide to go long on (buy) Apple shares for £10 per point of movement at 135.20.
After three days, Apple shares have indeed moved in your favour and increased to 135.50/135.65. You decide it’s a good time to close your trade. This means you’ll be coming out with a profit of (13550 – 13520) x 10 = £300, excluding any daily funding charges.
On the other hand, if you originally decided to sell Apple for £10 per point at 135.05 and then closed at 135.65, you would have ended up with a loss of (13565 – 13505) x £10 = £600. Once again, excluding any daily funding charges.