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Introduction to Spread Betting
One area of the markets that has become increasingly popular over the past several months is the use of what is called Spread Betting; otherwise known as CFD’s (Contracts for Differences). Spread betting is quite similar to the options and derivatives marketplace as it is a high-risk speculation on the direction of a particular index or underlying asset. There are a few caveats to spread betting that traders need to be aware of before jumping into these types of speculations. Before we get into that, let’s talk about some facts about spread bets.
Traders do not need to own the underlying asset to make a speculation about that asset. Options work the same way, you don’t necessarily own MSFT stock, but you own the call or put; basically the direction of MSFT.
Spread betting is defined as a gambling and therefore is almost always tax free
As with most trading instruments, there is the possibility for significant financial loss. Remember, the markets reward risk.
Spread bets are not handled through traditional brokers. There are trading firms that specialize in Spread Bets.
Let’s work with an example to see how a Spread Bet works...
QQQQ is currently trading at $40. The trader believes that this price is severely undervalued and is headed up. The trader places a $5 bet. This means that for every penny QQQQ goes up, the trader makes $5. Remember, the trader did not buy any shares of this stock, only placed a speculative bet on the direction of the stock. To receive $5 for every penny of upside, a typical trader would have to purchase 500 shares of QQQQ. When the price of the stock is $40, this equates to $20,000 of buying power. The “Spread Bet Trader” utilized significantly less capital but may yield the same return as the standard trader.
The basic premise behind the “Spread Bet” trade is the spread; hence the name. When a trader wishes to place a spread bet, they are given a couple of important numbers about the trade. The first of these numbers is the Spread Price. The Spread Price usually looks something like this…..
Spread Price: QQQQ $40 – $42
This means that if you believe QQQQ is headed up, you would place a spread bet at $42. This is the trading equivalent of buying the ask.
If you believe that QQQQ is headed down, you would place a spread bet at $40. This is the trading equivalent of selling the bid.
Knowing this…let’s outline the life of a spread bet trade.
Symbol: QQQQ
Bet = $5
Spread Price $40-$42
Long Entry Price = $42
.01 movement = $5
If the price of QQQQ goes to $50…..
$5 bet (X) $8 = $4000 Profit
As we can see, as potentially lucrative as Spread Betting may be, there is a large amount of financial risk in this type of speculation.
Keywords & Financial Terminology
CFD's: Contracts for Differences (Another name for Spread Bets)
One area of the markets that has become increasingly popular over the past several months is the use of what is called Spread Betting; otherwise known as CFD’s (Contracts for Differences). Spread betting is quite similar to the options and derivatives marketplace as it is a high-risk speculation on the direction of a particular index or underlying asset. There are a few caveats to spread betting that traders need to be aware of before jumping into these types of speculations. Before we get into that, let’s talk about some facts about spread bets.
Traders do not need to own the underlying asset to make a speculation about that asset. Options work the same way, you don’t necessarily own MSFT stock, but you own the call or put; basically the direction of MSFT.
Spread betting is defined as a gambling and therefore is almost always tax free
As with most trading instruments, there is the possibility for significant financial loss. Remember, the markets reward risk.
Spread bets are not handled through traditional brokers. There are trading firms that specialize in Spread Bets.
Let’s work with an example to see how a Spread Bet works...
QQQQ is currently trading at $40. The trader believes that this price is severely undervalued and is headed up. The trader places a $5 bet. This means that for every penny QQQQ goes up, the trader makes $5. Remember, the trader did not buy any shares of this stock, only placed a speculative bet on the direction of the stock. To receive $5 for every penny of upside, a typical trader would have to purchase 500 shares of QQQQ. When the price of the stock is $40, this equates to $20,000 of buying power. The “Spread Bet Trader” utilized significantly less capital but may yield the same return as the standard trader.
The basic premise behind the “Spread Bet” trade is the spread; hence the name. When a trader wishes to place a spread bet, they are given a couple of important numbers about the trade. The first of these numbers is the Spread Price. The Spread Price usually looks something like this…..
Spread Price: QQQQ $40 – $42
This means that if you believe QQQQ is headed up, you would place a spread bet at $42. This is the trading equivalent of buying the ask.
If you believe that QQQQ is headed down, you would place a spread bet at $40. This is the trading equivalent of selling the bid.
Knowing this…let’s outline the life of a spread bet trade.
Symbol: QQQQ
Bet = $5
Spread Price $40-$42
Long Entry Price = $42
.01 movement = $5
If the price of QQQQ goes to $50…..
$5 bet (X) $8 = $4000 Profit
As we can see, as potentially lucrative as Spread Betting may be, there is a large amount of financial risk in this type of speculation.
Keywords & Financial Terminology
CFD's: Contracts for Differences (Another name for Spread Bets)