How Spread Trading Works

The concept of spread trading is very simple. The sell and buy price are called the bid and offer prices. If you think a market is set to rise, you buy at the offer price, or if you think the market will fall, you sell at the bid price.

You can limit your loss on an open position; this is done by using a ‘stop’ or ‘stop loss’. Stop losses are free of charge to place, but are not guaranteed, Please speak to your chosen spread trading company to get more information about this.

Example 1: Buying the Daily Yahoo

  • Imagine that it is 1st November and Yahoo is trading at 2311 (which is US$23.11).
  • You check the spread betting company’s price which shows the underlying market, and it is 2306.7 – 2312.3
  • This is a spread aof 5.6 points.
  • The period is Daily – the est is just for the day and would be appropriate for someone looking for an intraday movement in the stock price.
    2306.7 is the sell/bid price, and 2312.3 is the buy/offer price.
  • You decide to buy at £1 per point at 2312.3.
  • You will be making £1 for every point that Yahoo rises above 2312.3, and lose £1 for every point the price falls below 2312.3
  • Over the course of the day Yahoo rises to 2392.3 and you decide to sell your position and take profit.

Your profit is calculated as follows:

You sold at: 2392.3
You bought at: 2312.3
Number of points profit: 80
80 points profit x £1 per point = £80 gain

Example 2: Selling the Daily Dell

  • Dell is quoted at 2400 – 2405.
  • After performing your analysis, you feel Dell is going to fall, and you decide to place a spread bet, selling Dell.
  • You sell at £ per point at 2400.
  • After some hours, Dell rises to 2430, hitting your stop loss.
  • You lose £30, which was the rise you were comfortable with when you placed the trade.