Spreadbetting basics

[jonboy123]

If you BUY £5 per point, this means you make £5 for every point the price goes up and lose £5 for every point it moves down.

Say if the shares are priced at 53p OFFER.
You buy £5 per point at 53p share price.
So you make £5 for every point the price goes above 53p, right?

And what is classed as a point? a full round penny? Would 0.5345 be classed as a point? 0.535?
And how much cash do you deposit? Just £5?

So say if you SELL at 56p BID.
How much profit is that?

I understand spreadbetting is a leveraged thing.
But i dont understand how much you deposit and on what basis/criteria.

Thankyou.

 

[jonboy123]

Megameul: (sorry just found your post, hope you dont mind me posting it here) thanks.

"A point is a unit decided by the spreadbetting company, and you bet 'per point'. A point might be 1 penny for a stock. So if you bet £5 per point, for every penny that stock moves up or down you make or loose £5. For forex, a certain currency pair might have 0.001 as 1 point. So if you bet £2 per point and you go long at 1.418 and the price moves to 1.420, it has moved 2 points. Because you have bet £2 per point you will then have £4 profit. You should always be sure what defines 1 point in whatever you are trading so you know what size stake you should put on..."

So i guess diff companies would define a point differently.

 

[megamuel]

Hi Jonboy,

I got your PM, I'll try to answer all the questions here.

In your example above (first post) yes a point would be 1p. So for every 1p the price moves upwards you will make £5. But you can't buy at the bid price and sell at offer price immediately for profit. We've been through this before. You buy at the offered price and sell a the bid price. This means that any trade opened will be at a loss. The price will need to move in your favour for any profit to be made. In your example, if the price has move 3p in your favour and you were £5 per point you'll have made £15 profit.

I'll give you another example. Tesco is currently 347.7 sell/bid and 348.5 buy/offer. 1 Point is 1p. If you think price is going to rise you'll go long (buy). You need a strategy that has a statistical edge to make a decision like this. If you just guess you'll lose all your money. Anyway, you buy at 348.5 £10 per point. If you were to sell immediately, the sell price is 347.7 so you'd be selling at a 0.8 point loss, which would be £8 loss. So you need the price to move in your favour. Now lets say you buy at 348.5 and the Tesco stock moves in your favour. Price moves to 362.3 sell/363.1 buy and you decide to take your profit. You sell at 362.3. Total move is 13.8 points. Since you were £10 per point thats £138 profit. On the other hand if the price went down 13.8 points while you were long you'd have lost £138.

As for depositing money in your account, you're confusing yourself again. Its really quite simple. You don't deposit money in to the account for each trade, you simply deposit an amount of capital that you can afford to lose. If your losses become too big you'll recieve a margin call telling you to deposit more capital or close all your trades.

As per your PM, I use Interactive Investor but I don't think they are the best. I am considering opening a new account with futuresbetting.com but I think IG Index are also quite reputable. You also ask "How much do I have to deposit?". As much or as little as you like! But as I said previously, make sure its an amount that you can afford to lose, because you almost certainly will lose it. As I have advised you previously I'd recommend reading a book or two first. Start with something like "The Financial Spread Betting Handbook" by Malcolm Pryor.

Do you know on what basis you are going to buy and sell? Can you tell me? You need to develop some rules for this. Otherwise you'll just be guessing/gambling. In which case a casino would be a more fun way of losing your money! Maybe you could try some demo trading first (pretend money) and see if you are any good before risking any real money.

Good luck,

Sam.

 

[jonboy123]

thankyou again for such a thorough reply.
Yeah i know you cant buy at BID and sell at Offer, i remember our past convo! i understand it now a little more.

With your tesco example, but how much money did you physically put into the account? £10?

Oh....but IG say its a leveraged product, which is like you pay a margin for much more exposure. you get to play with more shares than you can afford.

oh...so for the tesco example, you just make sure you can afford a loss of £150 roughly, and just put that into your account just in case. And then you just say £10 per point, and thats it? So you kinda work out, how many points can you afford to go the other way (loss) and just make sure you have that surplus in account in case. Thats it right?

So wheres the leverage come into it then?

So no shares are actaully bought or sold...and...
Its just a "bet" with the spreadbetting company?

This is becoming clearer.
So you only deposit what you may potentially lose if it goes the other way.
The spreadbet in itself doesnt cost a thing, bar the spread diff. Right?

 

[megamuel]

You can put as much or as little in your account as you want but you need to have enough in there to cover any possible losses.

In the Tesco example where you buy at 348.5 £10 per point. The most you could lose is 348.5 x 10 = £3485 But you don't need £3485 in your account to open the trade.

There will be a margin factor for every instrument you trade. For Tesco this is 10% of your total exposure. Your total exposure is £3485 so you need £348.50 in your account to trade Tesco at £10 per point. You can use a stop loss to reduce your total exposure. For example, if you place a stop loss on your Tesco trade at 328.5, your exposure is reduced because you are only risking a 20 point loss (£200 at £10 per point). The more you reduce your exposure by using stop losses the more trades you can have open simultaneously up until you are using up all of your margin, but that isn't recommended as if your losses become too big you'll recieve a margin call telling you to deposit more capital. If you don't, I think they can close the positions on your behalf.

You kind of have the right idea, you basically work out what you are risking and make sure you have enough in there to cover it. Use stop losses to reduce your risk. As a guide you should only risk about 2% of your capital per trade. For example, if you have £2000 in your spread betting account, you shouldn't risk more than £40 (2% of £2000). If I was using this money management on the Tesco trade, buy at 348.5 I would set a stop loss 4 points away at 344.5. If the price moves 4 points against me I'll be stopped out for a £40 loss. However, its normally easier to work it out the other way around. I.e. Work out where to enter and place a stop loss first. Then divide 2% of your capital (£40 in this case) between the number of points between entry price and stop loss to work out how many £ per point you should trade. For example, you want to go long Tesco at 350, you want to place your stop loss at 340 (because your technical analysis indicates this), therefore you are risking 10 points on the trade. 2% of your £2000 capital is £40. Divide £40 by 10 points. Thats £4 so you would enter your stake as £4 per point.

Yes no shares are bought or sold, its just a bet on price movement. The cost of the spread bet is in the spread correct, also if you hold a trade overnight you'll pay a bit but not much. Depends whether its spot or futures. Anyway, I'm tired of answering questions now. Get a book!

Sam.

 

[luckystrike23]

i think you could do worse then reading some of the faqs here Spread betting questions? Find answers with these FAQs or ask one of our experts

 

[jonboy123]

thanks people. Great info. Megamuel: i think i PM'd you my reply, if not, i will.


Example: 10p BID......12p OFFER (BUY)
£1 per point....so this would mean £2 loss when you open the position?

So the BID (SELL) price has to go to 12p to break even?
Which means the OFFER price would be around 14p.

Is this right thinking?

So the loss when you open the position, is basically the spread.