Spread Betting Explained, With No Jargon

 

Spread Betting is a phenomenon that has been seeing its day over the past couple of years. In reality, it has been around since 1940, or thereabouts. Created in America, it spread worldwide, finding its perfect environment online. Spread Betting is fast paced by its very nature, the faster the better. The web is its perfect home, where processing speeds can zoom in closer and closer on the fickle behavior of markets, commodities, stocks, and lots of other stuff. Often marketed as an investment opportunity, spread betting has more relevance to the casino than to the balanced portfolio, hence its name. I won’t try to obfuscate that fact. What I will try to do is explain how it works, without any jargon that you typically see in these kinds of reviews.

Imagine a chart of the S&P 500. It’s got lots of peaks and valleys. Now imagine you can zoom in so that one hour of market behavior is charted across your whole screen. From this vantage point you can see that areas that looked like smooth lines from far away are actually riddled with fluctuations. Long-term investors are only interested in growth (or losses) across years and decades. They don’t bother with the little wiggles that markets and stocks take every day. But this is where spread betting makes its home.

To play the game, you’ll find an online spread betting broker, place a deposit to be held against your potential losses, and to enable you to buy contracts, representing underlying stocks, bonds, commodities, lots and lots of stuff. We’ll say you buy a contract for gold. Understand, you’re not actually buying real gold, or shares or anything like that. You are just putting money down to place a wager on the behavior of Gold’s value.

Now you’ll select a timeframe. You can do longer terms, like weeks, but since spread betting is about speed and sudden changes, we’ll do just an hour for this example. Say Gold is at 1225. You will be betting on the change in value one hour from now. But that’s not all. To win, you also need to pick the direction of price change, gains or losses. So you think that Gold is going to be more valuable in one hour than it is now. You lock your bid in and wait. An imaginary line is drawn in the imaginary sand. 1227. In order to get a payout, Gold has to grow by at least that much. If it grows, but not that much, you usually neither win nor lose. But here’s where it gets interesting. You get more money (usually something like $10/point) for every point that Gold’s value exceeds that benchmark of 1227. If it soars all of a sudden and finishes the hour at 1236, you just made $90 in an hour. Not bad for most people. Of course it could also drop beneath 1223, in which case you lose money out of the deposit you made in the first place.

The only wrinkle in this whole scheme is that you can cancel contracts early, to lock in juicy gains or limit ugly losses. There could be other rules, depending on your nation, the broker you’re using, and whatever else. Read the fine print before you play and don’t use sketchy brokers.
So as an investment, I would say this is dubious. The potential gains are in line, however, with any potential losses. Where else can you hope to have 500% in 2 hours? But like any gamble, it’s also very easy to lose. Unless you have some kind of clairvoyance with regard to market values, or knowledge of one options in particular, you don’t want to get carried away with spread betting. But if you feel like a lark, or you know something we don’t, you might just be able to get a big payday. Can’t say we didn’t warn you. But the risk is part of the whole game. Enjoy at your own risk, and may you see great yields.


Categories: Stock Market

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October 13, 2014 Spread Betting Explained, With No Jargon