That explains the principle of spread betting. There are a few points to bear in mind. Firstly, the amount of the spread is very important. The smaller the better. You can see if you’d immediately changed your mind after placing the bet above, and decided to close it you would have had to sell at 5986p, and that would be a loss of four points which would cost you £20. That’s precisely where the broker makes his profit. With a smaller spread it would have cost you less. Spread betting providers vary in the amount they charge for the spread, and some providers are cheaper when you bet on indices, while others might be cheaper if you bet on shares. When you are looking for a provider you must compare the spread they offer on the markets that you want to bet on.
I also simplified the example slightly by not talking about how long the bet lasted. There are two main types of spread bet, the daily or intraday bet which expires at the end of the day and can usually be rolled over to another day, and the quarterly bet which goes up to the next quarterly date, which you can always find out on the website. The quarterly bet can be closed by you any time up to that date, which means you can choose to close it when it is showing a good profit and not wait, just in case the yield goes down again. You can also roll over a quarterly bet to the next quarter if you want to keep it open. Some dealers also offer a hybrid type of bet, such as weekly bets. It doesn’t make a whole lot of difference which you use. Your broker charges you a small amount every night for holding open a daily bet, whereas the quarterly bet has no daily charge, and the breakeven is usually if you hold the bet for a couple of weeks.
In spread betting you trade on margin, which means you do not pay the full cost of the bet upfront. You need to have sufficient funds in your account to cover any potential losses, and the amount that is needed depends on your spread betting broker and his view of the risk. If you spread bet online, this will be calculated automatically so that you always know where you are.