Defining Financial Spread Betting
Financial spread betting is a form of gambling whereby you win or lose money dependent on the movement in value of a financial instrument. In this article we’ll describe financial spread betting in detail and then look at a worked example on the FTSE 100 index.
In a financial spread bet we bet a price per point of movement and there are a whole range of possible outcomes. If we are betting on the movement of an index, then that index could move any number of points in either direction.
Financial spread betting is unlike fixed odds betting where you know your exactly how much you stand to win or lose up front. In spread betting you can win or lose a theoretically unlimited amount of money.
A spread bet market is defined by its bid and ask prices. The bid price is the price at which we can “sell” the index and the ask is the price at which we can “buy” the index. In actual fact we aren’t buying or selling anything; we are merely betting on the direction of its future movement.
When entering a spread bet you choose the amount of money that you wish to wager on one point’s movement. Your win or loss is then defined as the movement in the instrument’s price multiplied by your wager.
The difference between the bid and the ask is known as the spread. The spread is where the spread betting company makes their money. To break even on a spread bet you need the instrument to move in your favoured direction by at least the spread.
To clarify financial spread betting, let’s work through an example bet.
Worked Example Of A FTSE100 Index Spread Bet
Our spread betting company defines this morning’s FTSE100 index spread as 5300 – 5304. This means that if we want to buy the index, we do so at 5304 and if we want to sell the index we do so at 5300. In entering the bet we are instantly down 4 points; the size of the spread.
We think that the FTSE100 index is going to rise today so we buy at 5304 for £10 a point.
Towards the close of the day we want to exit our bet. The FTSE100 index is now trading at 5322-5326. We sell at 5322 and this gives us a net gain of 18 points, which is £180 at our stake of £10 a point.
Bought at 5304
Sold at 5322
Points 18
Profit/Loss £180
If instead of rising in our favour, the FTSE100 index had fallen to 5290-5294 we would have exited our bet at 5290. This would represent a loss of 14 points, which is £140 at £10 a point.
Bought at 5304
Sold at 5290
Points -14
Profit/Loss -£140
Controlling Your Financial Spread Bets
You can see how we can directly control a number of aspects of this bet and all of them require careful attention. We can control:
- Whether or not we choose to enter a bet.
- The exact point in time at which we enter a bet.
- The stake size for that bet.
- The exact point in time at which we exit a bet.
We cannot control the future movement of the instrument, we can only have an opinion on its direction. That opinion will be right sometimes and wrong sometimes. The creation of a winning strategy relies on the careful definition of each of the factors that are in our direct control just as much as it does on our opinion of the future movement of the instrument. We’ll be discussing each of these factors in more detail over future articles.