A spread bet on a share or market index is technically a derivative contract, but in fact is very similar to any other form of betting. The firm taking the bet will quote you on a share or on a share index at some point in the future, typically a few months. You will be given an opening price consisting of two figures, the difference being ‘the spread’. You make a buy bet if you think the market price will be higher than the high figure quoted, or a sell bet if you expect the price to be lower than the low figure quoted, and you specify say, £10 per point. You close the bet anytime up to the date specified and collect your winnings if you bet correctly, or hand over what you have lost if you got it wrong. Your gains or losses are the difference between the opening and closing prices multiplied by the amount per point.
For example, you ask for a quote on BP two months ahead (say February). The quote is 500-505 (note that the spread quoted will be greater than the actual market spread). You take a buy bet at £10 per point. After a month or so, the price of BP has risen in the market and you ask for another quote for February and it is 520-525. You decide to cash in now. Your profit is 520 (the bid price now) - 505 (the opening offer price) = 15 points at £10 per point = £150. Suppose you had made a sell bet instead at £10 a point. You could close the bet now and your loss would be 525 (the offer price now) – 500 (the opening bid price) = 25 points at £10 per point = £250. If you felt that BP would fall between now and February you could keep the bet open.
The profits from spread betting are free of tax.
As with other derivatives, spread bets are risky and you must fully understand the technicalities before investing. Online information is available from firms who provide spread betting facilities. We are not aware of any independent sources of information online (if you know of any please tell us:mail ). The following links are given to help you if you would like to learn more, but we do not endorse the firms to whom we are linking or the products they offer:
The Beginner’s Guide to Financial Spread Betting by Michelle Baltazar is available from our bookshop.
Contracts for difference (CFDs) are another form of derivative. They are the subject of our next page.
|9 October, 2008 © 2008 K.R.Wade and Co Ltd|