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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
-
What happens if you can’t pay your tax bill, and what is "Time to Pay"?Millions are due to file their tax return this Friday as the self-assessment deadline closes. Though the nightmare is not over until you pay the taxman what you owe - or face a penalty. But what happens if you can't afford to pay HMRC your tax bill, and what is "Time to Pay"?
-
What does Rachel Reeves’s plan for growth mean for UK investors?Rachel Reeves says she is going “further and faster” to kickstart the UK economy, but investors are unlikely to be persuaded
