Probably the best way to see how spread betting works is by looking at some spread betting examples. Let’s first consider that you are spread betting on the FTSE 100, and expect that the value of it will increase. The spread betting provider may quote you 5543.2 — 5544.2 for the index. This means you can sell at 5543.2 or buy at 5544.2, a spread of one which is quite common for an index spread bet.
You place your long spread bet at the price of 5544.2, and bet £2 per point. You need a certain minimum amount in your account as a margin for this bet, and the exact amount will depend on your broker who will base it on the perceived volatility of the trade, and how much you could stand to lose. This minimum amount is called the Initial Margin Requirement.
Assuming all is well, and you see the index increase in price to 5728.3 — 5729.3 at your broker, you may decide to take your winnings. To close the spread bet you would sell at 5728.3, and it would give you a total point gain of 184.1. As you bet £2 per point, your winnings would be £368.20.
Now it’s important to see the consequences if things had not gone your way. Say you placed the same spread bet but the index fell in value. At a certain point, either by using an automatic order with your broker or by placing the order yourself you choose to cut your losses and exit the trade. Your broker quotes you 5367.8 — 5368.8 for the index, and you sell to liquidate your position.
As you’re selling, you use the lower number of 5367.8 when calculating your losses. While you have held the spread bet, the price has fallen from 5544.2 to 5367.8, a loss of 176.4. Your bet of £2 per point means that your losses are £352.80. Even with what seems like a small bet you find that you can lose a fair amount of money.
Now we’ll look at profiting from a fall in value, effectively taking a short position on a stock. The stock that has caught your eye is BP, as you have heard that they are in trouble with a deep sea rig. You ask for a quote, and your broker gives you 639.7p — 641.7p. You take a short spread bet at 639.7, at £10 per point or penny.
After two months, when the full extent of the disaster comes to light, BPs shares have dropped significantly, and you decide to take your profits. The quote from your broker now is 337.2p — 339.2p. To close your position you buy at the higher price of 339.2p. The total number of points dropped is 639.7-339.2, which is 300.5.
As your spread bet was for £10 per point, the profit you made on this trade £3005. While unusual, this shows the amounts that can be made with the leverage provided by spread betting.