How does financial spread betting work?
Traditional spread betting at firms like IGIndex involves an intermediary making a two way price based on their perceived likelihood of the price at which this market will ultimately settle or finish at. There will be a price at which you can buy the market and a price at which you can sell, and the difference in these two prices is the spread. This is where the market maker who sets this price will make their money.
For example if the quote on the Daily Footsie is 4740-4750 this means you are able to sell at 4740 if you think the market will finish at a lower price, or buy at 4750 if you think the market will finish higher at the end of the day. If punter A was to sell at 4740 and then in the next phone call punter B buys at 4750 the intermediary (market maker) will have made 10 units. On the footsie a one point move represents £10, so for buying and selling one contract the profit between 4740 and 4750 would represent £100. The number of contracts traded is decided by the punter.
The punter who has bought or sold the contract then has three choices.
- He watches the market move nicely in his favour and exits the trade in the same fashion to realise his profit.
- The market has moved the wrong way for the punter and faced with a loss he chooses to exit the position to prevent this loss getting any bigger.
- He leaves his position to ‘expire’ in which case his profit or loss will be governed by the price at which the market closes.
Even though there is no commission to pay, the intermediary has effectively taken money from you because of the spread he has made. In the example given you the punter can buy at 50 or sell at 40 but the true price of the Footsie Index at that point will be 4745 so the intermediary’s profit is ‘built in’ to his quote.
Trading financial markets have advantages and disadvantages and can be great fun and potentially rewarding, but punters need to be fully aware of the risks involved before they start.The above comments do not constitute investment advice and we accept no responsibility for any use that may be made of them. Please read our terms and conditions.