Whenever you spread bet on something, you're presented with two numbers: the buy price and the sell price.
So if you wanted to bet on the price of a stock index like the FTSE 100, for example, you might see prices like this on your spread betting platform:
If you thought the value of the FTSE was likely to rise, you could 'buy' at the higher price - also known as the offer price - of 6500.5.
If you expected the FTSE to fall, you could 'sell' at the lower price - known as the bid price - of 6499.5.
The gap between these two prices is called the spread, and this is what gives spread betting its name.
What is the spread?
Neither the buy price nor the sell price represents the exact value of the financial asset you're betting on (also known as the underlying asset). Instead, the buy price is slightly higher than this value, and the sell price is slightly lower.
In the above example, the real-world value of the FTSE would be halfway between the two prices, at 6500. The difference between the buy and sell prices is just 1.0 in this instance, which is a spread of one point.
How does the spread affect me?
The spread is essentially a fee that your spread betting provider charges to place your bet, and the narrower the spread, the better it is for you. Let's look at why.
To close a bet, you need to take the opposite action to when you opened it. So if you open a bet by 'buying', you close by 'selling' and vice versa.
In our FTSE example above, if you 'buy' at 6500.5, you'll need to 'sell' at the same price or higher when you close the bet, or you'll make a loss. This means the underlying FTSE price will have to rise by one point before you break even.
So the size of the spread determines how far the market will have to move for your bet to become profitable.
Bet sizes
When you spread bet, you stake a certain amount of money on each point of movement in an asset's price.
For example, if a UK share moved one penny in the underlying market, that's the equivalent of one point. (Note that what constitutes a point can vary between different markets and providers.)
You can bet however much you want per point of movement, subject to your provider's minimum bet size. Your profit or loss is the difference in points between the opening and closing prices, multiplied by the amount you've staked per point.
Example
Steve believes that Oil Company P's value is set to rise.
Its shares are currently priced at £20 in the underlying market, and Steve's spread betting provider is offering Oil Company P at a spread of 1995/2005.
UK shares are quoted in pence, so this is the equivalent to a bid price of £19.95 and an offer price of £20.05.
Steve places a 'buy' bet at the offer price of 2005, staking £5 per point.
A positive earnings forecast causes Oil Company P to surge to a market price of 2200. It's now quoted at 2195/2205.
Steve decides to close his position, 'selling' at 2195.
The underlying market has moved 200 points (from 2000 to 2200), however Steve's profit is based on a 190-point movement (from 2005 to 2195). This is due to the spread.
As Steve bet £5 per point, his profit is calculated like this:
£5 x 190 = £950.
Lesson summary
- When you spread bet, you're presented with a 'buy' price and a 'sell' price for each asset
- The 'buy' price is the higher price, and is also known as the offer price
- The 'sell' price is the lower price, and is also known as the bid price
- The gap between the two prices is the spread
- The spread is wrapped around the underlying market price and represents a fee for placing your bet
- Spread betting involves staking an amount per point of movement in the price of an asset
- Your profit or loss is the difference in points between your opening and closing prices, multiplied by your stake per point
