Financial - Beginners guide to Financial Spread Betting
Back to the article list
Intro: The Basics to Betting on the Financial Markets
Written on Sunday 28th of October 2012

Introduction to financial spread betting

Financial spread betting bears all the hallmarks of spread betting on sport. This type of betting has commonly been thought of as a pastime for traders avoiding large tax bills. However it seems that willing punters, armed with a bit of knowledge of the financial trading are making a go of it. Many of the main financial spread betting sites offer guides and recourses to help players who may be slightly daunted by the world of financial trading.

Important Note
: Financial spread betting is not for the faint hearted, as the risks can be high due to the volatility of financial markets.  

Financial spread betting V's share trading
The most common concept of trading on a particular stock market is to buy or sell shares based on whether you feel the shares will rise or fall. Profit or loss can be gained from changes in the market. There are many variations of this, but in its simplest form trading is carried out this way. Financial spread betting is different, where predicting the outcome of share prices is merely one of the ways of making a bet. Players can bet on a multitude of possibilities and changes in the world’s markets, stock, shares and commodities.

Benefits of financial spread betting
By allowing players to have a bet on just about any financial outcome, the amount of choice you get is staggering. You may feel that your ability to predict, say the change in price of bananas or number of points the London stock exchange will finish on is more favourable than trading on the markets. With financial spread betting you never own stocks or shares you are merely betting on them. Due to the nature of Spread Betting the potential for making money is limitless, however this also applies to the potential for losses. Almost all Spread Betting is done on the Internet or the phone, therefore players are finding it easy to trade on the spreads from the comfort of their homes.

Principle of financial spread betting
The words ‘Spread’ and ‘Index’ may sound a bit complicated to some. When you understand how this type of betting works you will realise that it is relatively straightforward. The best way of explaining Financial Spread Betting is through an example;

A financial spread betting company will offer a spread on the outcome of a specific event. Using the example of the number of points that the Dow Jones will close on at the end of a days trading. The spread is set at 9125 – 9135 points by the financial spread betting company. This means their prediction is that the Dow Jones will close between 9125 points and 9135 points.

You may feel that there is going to be a big day of trading ahead with many shares rising. Therefore you decide to ‘buy’ at £2 a point over the spread set at 9135.

If your prediction was correct and the market closes at say 9150, then you will get £2 for every point over the spread. (9150 – 9135 = 15, 15 x £2 = £30) Therefore you win £30 from this bet

However if your prediction was incorrect and the market closes lower than you expected at say 9115 points, you will have to pay the Spread Betting Company £2 for every point below the spread.

(9125 – 9115 = 10, 10 x £2 = £20) Therefore you lose £20 from this bet.

If you had chosen to ‘sell’ at £2 a point and the market closed on 9115 points then you would have won £20.

Pitfalls of financial spread betting
More a word of caution than anything else, stock market trading can be highly unpredictable. Sometimes the strangest, un-comprehendible outcomes happen. This can quite easily go against you. The more unexpected, the more money you are likely to lose. Just remember nothing is certain, so don’t kid yourself that it is otherwise or it may cost you dearly. Financial spread betting can be very complex and players who normally bet in this way are quite prepared to lose large sums as well as win them.