The term Spread Betting has been in use for some time and it is not only applicable to the world of Finance as it is used in gambling on sports and you may have inadvertently done some spread betting without realising it. There are however differences in Financial spread betting and sports spread betting. Sports spread betting is thought to have its origins in the USA and in sports gambling it is considered a spread bet if you are betting on the score of for example a rugby match and the bookmaker offers odds that include plus points or minus points for one side. This often happens when there is a clear favourite who would normally be odds on, so to make it more interesting and make the odds better the bookmaker will create a spread. This type of bet however is still a win/lose bet whereas in a true spread bet as in the financial world you are effectively gambling on the accuracy of your bet rather than a fixed result. The bookmaker will try to avoid a draw in which case they have to refund the bet so they will often quote spreads that include half a point and as you cannot score half a point there can never be a tie.
Financial Spread betting is usually used for share prices but you can in fact place spread bets on a number of different indices such as the UK FTSE 100 or commodity prices such as gold or silver or on interest rates or even on currency movements but the principle is always the same. The bookmaker or trader will quote a bid and offer price which is the price at which you can buy (offer) or sell (bid) the stock. You then have to gamble whether the price will rise or fall and you place your bet according to a value per unit. For example Bank of Monaco (if there is such a bank) might be trading at €10.00/10.02 which means that the buying price is €10.02 and the selling price is €10.00. If you think that the price will rise ( called going long) you could maybe bet €5.00 per point which means that for every €0.01 that the price moves you are gambling €5 so if the price moves to €10.20/10.22 you will sell the stock at €10.20 and win 18 times €5 which is €90.00. There is not usually a time limit on movement but there will usually be a charge for every day that the bet remains open. If of course the price dropped to €9.50/9.52 you will lose 52 times €5 which is €260.00. The alternative if you think the price will fall is to sell (called going short). When going short you make money when the price falls and lose money if the price rises. As you can see, spread betting is a way of buying and selling shares without actually having to find the money for the purchase so for very little outlay you can win or lose large amounts of money, this is often referred to as leveraging or gearing. Bookmakers will require there to be sufficient funds in your account to cover at least some of your possible losses, they sometimes call this the IMR or Initial Margin Requirement and it should be quoted for each trade you wish to carry out. To work out how much money you need in your account simply multiply the IMR by the amount you wish to bet per point.
The other very big advantage over actually trading the shares is that you are gambling online and not trading so any profits will not be subject to tax, although legislation has a habit of changing quite quickly, and you are not paying any broker commission. In the UK for example spread betting is covered by the Financial Service Authority rather than the Gambling Commission. One of the ways to prevent massive losses is to place what is known as a “stop loss order” which in effect says that if a price goes against you when the price reaches your stop loss price, the trade will be automatically ended thereby fixing your loss. Of course if the price later recovers you are unfortunately no longer in the market. You can of course end your trade at any time no matter what direction the price goes, you do not have to wait until the price reaches your stop loss level to close a trade if you think you got it wrong; this does give you maximum flexibility.
Another use for spread betting is to protect an investment you hold in times of uncertainty. If you hold a substantial number of shares in one company but you are worried that the price will fall you could sell them in the open market in the hope of buying them back at a lower price later. The drawback with this is that you will pay broker charges and possible capital gains tax and even stamp duty of you buy them back later. Using spread betting as an alternative you could open a short position (equivalent to selling the shares) at however much a point and if the share price drops you will make a paper loss on the shares you hold but you will win the gamble on your short position thereby reducing or eliminating the paper loss. The flip side of course is that should the share price rise you will lose your spread bet but them you have made a paper gain in the value of the shares you hold. Due to the spread of the bookmaker you will never be able to cover both ways completely but you can certainly mitigate and profit or loss in uncertain times.
Good bookmakers who have financial spread betting available should have lots of information about the way it works and even tutorials to help you along; some will even allow you to open an account with play money so that you can try it out for free.