Spread betting

Enough of the theory, here's how it works

A spread better such as IG Index will quote you two prices in much the same way as an equity market maker would - giving you a bid and offer price (see our link on bid and offer prices).

One of the favourite bets is a punt on the movement of the Footsie (FTSE 100 Index).

We are offered a spread of 5,700-5,705. So what exactly does that mean?

Well, simple really.

If you think the Footsie is likely go above 5,705 then you would instruct the broker you wanted to buy.

And if you expected it to dip below 5,700 then you would instruct the broker to sell.

Clear?

Let's say for the sake of argument, we believe the market will end the day below 5,700 - perhaps we think after the recent good run there will be a bout of profit taking.

So we tell our bookmaker to sell. In fact we are ultra confident and stake £50 for every point the the Footsie falls below 5,700.

The spread betting firm will fix a price that mirrors the market movement.

At midday the spread has moved to 5,675-5,680, which means the Footsie has fallen.

Fearing a revival we want to take our profits on the bet.

So exactly do we do that?

Well, we would then ask the broker to buy.

The new buy price as we can see is 5,680.

We know we have won the wager with the spread betting company, but just how much have we made.

All we need to know is the points difference between price at which we sold the Footsie and point at which we bought to close off our position.

The maths is reasonably simple. 6,700 minus 6,680, which gives us a 20 point difference.

And remember, we were very confident in our ability to predict the movement of the Footsie so we staked £50 a point.

So that gives us tidy £1,000 profit.

Not bad for a morning's work.

And remember, this is a wager with a bookmaker so there is no

capital gains tax, or stamp duty. Isn't that just dandy?

Well let's see what happpens when it all goes horrendously wrong.

Let's take our bet on the Footsie.

We won't change much, save that we woke up and thought, well, the Footsie is on a roll and instead of sellling, we bought.

Remember the spread we were quoted was 5,700-5,705.

We bought at 5,705. So anything above that level is clear profit.

And we were, in this alternate existence, if anything even more bullish, so we staked £100 a point.

Rash, I would say as this is the first time we have ever made a spread bet.

But instead of roaring ahead, the Footsie starts dropping and at midday, chastened by our stupidity we decide to cut our loses and close the position.

Remember the midday spread was 5,675-5,680.

To close off we need to sell and have to do so at 5,675.

To calculate the losses we take the difference between price at which we bought and the price at which we sold.

So that gives is 6,705 minus 5,675 a difference of 30 points.

Now remember how rash we were?

We staked £100 a point, giving us losses of £3,000.

For the mega-rich footballers of the Premiership that is probably less than a day's wages.

But for most it equates to probably close to two-months' net salary. The moral of this story?

Well, obviously, don't bet what you can't afford.

But, I would say if you are going to indulge in something as risky and complicated as spread betting ensure that you know the risks involved.

Study as much as you can around the system.

Accept a stop-loss (which limits the downside) if it is offered.

The spread betting companies are not evil, they take every opportunity to educate and spell out the potential pitfalls.

If they offer you coaching, accept it.

Above all don't bet until you understand all the risks involved.

Some useful terms

• Margin: When you make a financial spread bet, you do not have to pay cash up-front to cover your whole exposure. Bookmakers will often ask for initial margin of just 10% to 20% of the value of your position.

• Stop-loss: To prevent losses on a bet exceeding a certain amount, traders can arrange a 'guaranteed stop' with their bookmaker. This automatically closes the bet down if the spread touches a certain level.

• Close out: The ability to shut down a spread bet before its expiry date. The closing level will be the bottom of the new spread (for an 'up-bet') or the top of the new spread (for a 'down-bet').

What Exactly can you bet on?

Well as you probably already know, the craze these days is to bet on sport, particularly cricket and rugby.

But as we have seen you can also bet on the movement on the main international indices.

Companies such as IG will allow you to bet on the movements of the top 350 UK, shares, foreign exchange markets and even the oil price.

The latter two are usually the exlusive preserve of professionals who know those markets intimately.

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