Beginner's Guide to Spread Betting
How it Works, Similarities and Differences
Stocks/ Shares
Example
As we have already mentioned, spread bets are
denominated in £ and points rather than number of shares.
This difference may be confusing but with a simple equation you
can convert the £ per point trades size to the equivalent
number of shares. For this example we will be using Vodafone (UK),
VOD. It is currently trading at 116.00 / 25 pence. The spread,
as quoted by your spread bet firm is currently 0.25 pence, or a
quarter of one point. You wish to buy the equivalent of 100 shares
of VOD. You have a target of 146 pence. If you were to buy 100
shares on the open market it would cost you 116.25 multiplied by
100 = 11625 pence or £116.25. Every penny the share moves
will alter the value of your position by £1 (1penny * 100
shares = £1). Therefore £1 per point will give you
the equivalent of 100 shares. This is the same for all share bets,
including US shares because spread bet firms denominate US shares
in points and the number of pounds you bet per point move.
Forex Trading Example
As far as spread betting FX is concerned there is no concept of
lots only £ (GB Pounds) per pip. And because you are not
trading in the open market you are not simultaneously buying one
currency and selling the other you are simply placing a bet on
whether you thing a rate will move higher or lower. So, for our
example lets assume that the EURUSD is currently trading at 1.3600/02.
You place a bet to go long or buy the EURUSD because you thing
it will move higher. If you are right and it moves to 1.3700/02
and you close your bet at 1.3700. 3700 minus 3600 = 100 pips profit
multiplied by £1 per pip = £100. Of course the opposite
is true if the rate were to move to 1.3500.
By betting £1 a pip it is the equivalent of one mini lot
so if you want to trade the equivalent of one full lot, i.e. 10
units of currency per pip, you will have to bet £10 per point.
You should bear in mind that 1 GBP is worth almost 2 USD at the
current trading rate so your bet should probably be more like £5
per pip.
Margin requirements are
also slightly different. Rather than the fixed 1% margin you
would need to provide for a 100:1 leveraged forex account spread
bet firms will ask you to provide a fixed amount of capital per £ per pip. This figure, sometimes knows as the
National Trading Requirement (NTR) is based on the perceived volatility
of the currency pair or cross you wish to bet on. For example, your
spread bet firm may ask you to provide £150 for every £1
bet on the GBPUSD but only £75 for every £1 bet on
the EURGBP.
Contents:
1. Introduction
2. How it Works, Similarities and Differences
3. Examples
Next:
4. Gambling vs Trading
5. Summary
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