Polls / January 6, 2011

Do you know what “spread betting” is in financial markets?

A quarter of respondents to the latest eZonomics online poll know what “spread betting” is in financial markets, while 75% of respondents are not so sure.

Spread it around – for a short time only
Spread betting in financial markets involves buying or selling financial products (such as shares, bonds or exchange rates) in a particular way. The “bets” are typically held for a very short time in the hope that a rise (or fall) in the price will lead to a profit under the specific bet. They tend to be complex arrangements and are not recommended for inexperienced investors. Spread betting is also seen in sports but, beware, the UK Gambling Commission’s 2007 British Gambling Preference Survey said spread betting was highly associated with gambling problems.

Give us an example
In our hypothetical spread bet, a share is trading at 100 on the share market. A spread bet is available allowing an individual to “buy” the share at 105 or “sell” at 95. The spread bet is quoted as 95-105. The individual who expects the share price to go up can take the bet at 105 – so if they sold immediately, under the terms of the arrangement only 95 (minus fees) would be returned and they would suffer a loss. To make a profit the spread must move to at least 106-116. If the individual sells at 106 they make a “one point” profit. A key element of spread betting is that individuals pay an agreed amount for each point the price moves. If the amount per point is agreed at €10, “one point” profit in the example above gives €10 (minus fees).

Spread betting does not spread risk
Spread betting differs both from fixed odds betting and outright buying and selling of financial products because of the requirement to set how much money will be won or lost per point. This is known as gearing and increases the amount of money that can be made or lost. Similar to buying and selling futures and options contracts, spread betting is not usually recommended for retail investors. Brokers promoting spread betting are usually regulated by financial authorities.

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eZonomics team
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