Financial Spread Betting (or Trading) offers a tax free method of speculating on financial markets.
Quite simply, if you think a particular index, share, commodity, currency or sector will rise, you place an UP bet. This also referred to as a Long position or a buy.
On the other hand if you think the particular market will fall you place a DOWN bet (commonly referred to as a Short position or a sell).
The amount of profit you make or money you lose depends on how right or wrong you were and how much you risked per point.
At the time of placing the bet you decide how much you would like to risk per point. This can be as small as ?0.01 or a large amount such as ?1000+.
Most bets work on either a daily, rolling or contract month basis.
A Daily bet is one which is only open during one particular trading day. You could place the trade at 11am and, if you do not close it beforehand, it will be closed at the end of trading (4.30pm in the case of the FTSE 100).
A Rolling bet is one which, unless you state otherwise, rolls through to the next trading day. This costs a little money and your bookmaker should be able to give you more details.
A trade opened for a particular Contract Month will end up to 3 months in the future. There will be a specific date when the contract finishes known as the Expiry Date or Last Trading Day.
For example: if you opened a trade on the FTSE 100 September contract, the expiry date will be in September, usually the third Friday. The trade will expire at the close of trading on that day.
Some bookmakers also run other types of bets such as weekly and also "Year End".
Day-traders or "scalpers" will tend to use Daily or Rolling bets but as a beginner it may be wiser to trade over a longer time frame.
If you decide to day trade, bear in mind that you must be correct almost immediately to profit. If you select a longer time scale, you have some breathing space for the trade to turn around.
An example of a trade
It is June and the FTSE 100 is trading at around 5000 and you are confident that it will go higher before September. To back your opinion you decide to use a spread bet.
Logging onto your internet account, the bookmaker quotes you 5010-5020 for the FTSE 100 September contract.
This means that you can buy (go long) at 5020 or sell (go short) at 5010.
Spread betting quotes are always displayed as two seperate prices. You buy at the higher price and sell at the lower one. The "spread" itself (in this case 10) is a charge added by the bookmakers. Different companies have different spreads, some larger than others.
As you are backing the market to go higher, you would buy ?1 a point (or however much you like) at 5020.
September arrives and you are close to the expiry date for the contract.
Rather than wait for the last trading day you decide to take your profit as the FTSE 100 is now quoted at 5305-5315.
You close your position by selling ?1 per point at 5305.
As you were correct in thinking the FTSE would rise, you have now won ?285:
(5305 - 5020) x ?1 = ?285 tax free
There is no need to hold your position until expiry, you can close it at any time to take your profit or limit your loss.
If the FTSE was trading at 5500 in July, you could have closed then for more profit. All you have to do is log into your account and place another trade in the opposite direction for the same amount per point to close.
Of course, if the FTSE had gone lower in this example you would've lost money but you can use stop losses to limit the loss.
Ben Catt is an active financial trader and runs a free website containing hints, tips and information about tax-free financial spread trading and betting in the UK. The site can be found at http://www.FinancialSpreadTrading.co.uk.
He also runs a business opportunity information site - http://www.BizOppsUK.com