Key Components of a Spread Bet

To fully understand spread betting and make informed trading decisions, it's essential to grasp the key components of a spread bet.

What is the Spread?

The spread is the difference between the buy (ask) and sell (bid) price. You will always buy at the top of the spread and sell at the bottom of it.

For example, in the market below the current market price is 200p. If it had a two point spread we would offer a price of 199p (bid) and 201p (ask).

With financial spread betting if you think the price will go up, you buy at the top of the spread. If you think it will go down, you sell at the bottom of the spread.

STAKE

In spread betting, "stake" refers to the amount of money you wager per unit of movement in the underlying market. It is a crucial concept that determines the potential profit or loss you can incur in spread betting.

To place a bet, you need to decide how much you want to stake per point of movement in the market. A "point" represents the smallest unit of price movement in the asset, which can vary depending on the market. For example, in financial markets like stocks or indices, a point may correspond to one pence or one index point, while in forex markets, a point may represent the fourth decimal place (pip) in some exchange rates.

Your stake per point determines the monetary value of your bet for each point of movement in the market. Let's say you decide to stake £100 per point on a stock. If the stock moves up by 7 points, you will gain £700 (7 points * £100 stake per point). Conversely, if the stock moves down by 7 points, you will lose £700 (7 points * £100 stake per point).

Leverage

Leverage allows us to only place a fraction of the full trade value to open a position. This allows traders to gain a larger market exposure without using up extra capital. This tool is a double-edged sword as it amplifies gains but also losses, therefore increasing your risk. It is important to understand how much you are risking with each trade and to protect yourself against a market that is moving rapidly against you, using risk management can help with this.

Margin

Margin is the amount of capital required in your account to support your leveraged positions. When trading on margin, a broker is essentially loaning you the full value of the trade, requiring a deposit as security. The amount you will be required to have in your account to open a trade is often expressed as a percentage of the notional value of the trade, this is known as the margin requirement or NTR (Notional Trading Requirement). The margin requirements may differ between markets with more volatile assets such as crypto, requiring a larger margin.

The full value of the trade in the example above is £20,000, also referred to as the notional trade size. You can calculate the notional trade size by taking your stake and multiplying it by the price of the asset you are spread betting on.

You can calculate your required margin by taking the notional trade size and multiplying it by the margin % offered on the asset.

Going Long and Short

As we know the markets can rise and fall and as a trader you can capitalise on both these directions. More people are familiar with trading in just one direction, they most likely have only ever bought an asset (going long) and sold it after the price rose.

But it is possible to sell an asset without owning it beforehand (going short), you sell to open a short trade and then buy to close it. How can we sell something we do not own? We borrow the stock, sell it, and then buy it back to return it to the original owner.

Why would people short an asset? Perhaps they believe the price of the asset is going to fall and they wish to capitalise on this movement by selling high in hopes of buying it back later at a lower price.

Opening and Closing Orders

An opening order

• An instruction to initiate a new position in a financial instrument.
• It is used to enter a trade and take a position in the market.
• There are two common types of opening orders: a market order, and a limit order.

Market order

• An instruction to buy or sell a at the current market price.
• When a market order is placed, it is executed immediately at the prevailing market price.
• Market orders ensure quick execution but do not guarantee a specific price.

A limit order

• An instruction to buy or sell at a specific price or better.
• If the market reaches the limit price, the order is executed at the desired price or a better one.

For example, if the current market price for a stock CFD is 50p, a trader may set a limit order to buy at 48p. This means that if the price reaches or goes below 48p, the order will be triggered, and the trader will enter a long position.

A closing order

• An to exit or terminate an existing position.
• It is used to close a trade and realise any profit or loss.
• There are three common types of closing orders: market order, limit order and stop order.
• Find out more about managing your risk when trading.

The limit order can be used to take profits by closing a winning position and a stop order can be used to minimise losses by closing a losing position.

For instance, if a trader holds a long position in a stock CFD that was bought at 50p, they might set a stop-loss order at 45p. If the market price reaches or falls below 45p, the stop order will be triggered, and the position will be closed automatically, limiting the trader's potential losses.

Timeframes and Expiry Dates

Spread bets can be placed over various timeframes, from intraday trades to long-term positions. Each spread bet comes with an expiry date, which is the date when the bet will be closed automatically if not rolled. Investors can choose between daily funded bets, which roll daily, or longer-term futures, which have a predetermined expiry date in the future.

Working Out Your Profit/Loss   

Your profit or loss is determined by the difference between your buy or sell price and the price at which you close your trade, multiplied by your stake size.

You can see how this works in practice via the below example of a financial spread bet on a share price as well as examples on other markets using the tabs below.