Spread betting: Know your spreads

Bid-to-offer spreads are a fact of life in financial markets. So here's a quick reminder about how they work.

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Bid-to-offer spreads are a fact of life in financial markets. You come across them when you buy shares, bonds, currencies and of course every time you open, or close, a spread betting position. So here's a quick reminder about how they work. Remember, although spread betters don't suffer a fixed commission as they would when trading shares say £9.99 per trade you will suffer any spread set by your broker.

Say you are planning to place an 'up' bet on the FTSE 100. You check the price at your online broker and find it is 5308-5310. Don't forget that, as with all other bid to offer spreads, the gap between the two prices represents your broker's potential profit. Also,always remember that a buyer opens a position by taking the price on the right the broker's 'offer'. A seller, betting on falling prices, would enter a trade at the price on the left the broker's 'bid'.

So you might 'go long' for £10 per point at 5310. What if the spread moves up, as the FTSE climbs, to 5309-5311? Should you close your position? No. If you now "sell the spread" you will be selling at 5309. So you are facing a one-point loss, or £10. You need the spread to move up to say 5311-5313. Then you could sell it and take away a £10 profit, (5311-5310) x £10.

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As a rule of thumb, the more popular the thing being traded, the narrower the spread when you open a position and the better your chances of making money.

Never place a bet without asking for the spread first usually it will appear on screen before you confirm a deal. And watch out for information displayed on websites if it is delayed rather than 'real time' you won't be able to rely on it for betting purposes.

Tim Bennett

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.

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