1. What is Spreadbetting?

Spreadbetting is, in its most basic form, betting on the outcome of an event. Your spreadbetting company will forecast the outcome of the event and you bet on whether the actual outcome will be higher or lower than their forecast.

The most commonly traded spreadbets are typically those relating to the stock market indices, such as the FTSE 100 in the UK or the Dow Jones and Nasdaq in the US.

• The spreadbet company is neutral about the FTSE’s prospects for the day and forecasts that it will close between 5,300 – 5,305 at the end of the day, (this is known as the quoted ‘spread’).
• You are expecting some good company results and think the FTSE is likely to finish up around the 5,350 mark at the end of the day – so you choose to ‘buy’ the FTSE and bet £10 on every point it finishes above the quoted spread.
• The results come in, they are not quite as good as you predicted, but the FTSE closes at 5,325.
• You win (5,325 – 5,305) x £10 = £200. A good result!

However, spreadbetting is certainly not limited to the stock market indices. It is commonly used for betting on individual stocks & shares, other financial markets, sporting events and even major political events. And at its core is the adage that 'the more right you are, the more you win'.

2. Spreadbetting Advantages

There are many ways to invest in the financial markets - through individual shares, collective investment funds or through more specialist derivative products. Although spreadbetting offers a number of advantages:

• Ability to ‘go short’.   Unlike many other investments, spreadbetting is not limited to making profits in a rising market – it allows you to bet on the markets going up, down or even not moving at all.
• Leverage.  Spreadbetting allows you to bet ‘on margin’, i.e. you only need to put down a small deposit to place the bet – and you could win many times your original bet. Although please remember that you could just as easily lose much more than your original bet!
• Tax free winnings.  Spreadbetting is currently classed as gambling by the tax office – and all winnings are free of capital gains tax.
• No commission.  Spreadbetting firms make their money from the spread between the ‘bid’ and ‘ask’ prices and do not charge dealing commissions.
• Small stakes.  Generally minimum stakes are low – typically £1 point – allowing you to place whatever size bet suits your budget.

This combination of simple rules, low transaction costs and ability to bet on any type of market movement makes spreadbetting a highly flexible and attractive alternative to the more traditional investment markets.

3. Spreadbetting Markets

Spreadbetting is not limited to the stock market indices and is now commonly used as the preferred method of speculating on a wide variety of events. The two most established sectors are the financial and sporting events markets.

Financial spread betting covers a wide variety of markets:

• Stock market indices & sectors – the FTSE, Dow Jones, Nasdaq, DAX, Nikkei and many others, plus a wide variety of industry sectors.
• Individual equities & bonds – choose from thousands of individual equities & bonds from the UK, US and Europe.
• Currencies & interest rates – all the world’s major currencies and several major bank interest rate movements.
• Commodities – speculate on the price of oil, precious metals, pork bellies and orange juice.

The sporting spreadbet sector includes all manner and combination of sporting bets from every major sporting fixture:

• Football – bet on the statistics for the full season or individual games – from overall winners to total goals and from number of bookings to ‘shirt supremacy’!
• Horse racing – all the major fixtures and a host of combination bets
• Cricket, rugby, golf, tennis, snooker, dog racing – all forms of combination bet on the statistics surrounding the results.

4. Examples

Now let’s have a look at a couple of practical examples of how you might use spreadbetting to trade the FTSE 100. There are a number of possibilities for betting on this index, including betting on mid-day prices, daily close prices and monthly prices. It is also possible to bet on the more volatile daily futures market for the FTSE, as well as the price of the FTSE 100 iShare.

Let’s assume that we switch on our computer at the beginning of the day and find that the FTSE 100 closed at 5,300 last night.

• Our spreadbet company is neutral about the FTSE’s prospects for the day and forecasts that it will close between 5,300 – 5,305 at the end of the day, (this is known as the quoted ‘spread’).
• We have the option of ‘buying’ the market, (or ‘going long’), in anticipation of the market finishing above 5,305 at the end of the day or ‘selling’ the market (‘going short’) in anticipation of the market finishing below 5,300 at the end of the day.
• We are expecting some good company results and think the FTSE is likely to finish up around the 5,350 mark at the end of the day – so we choose to ‘buy’ the FTSE at 5,305 and bet £10 on every point it finishes above the quoted spread.

Now there are 2 possible eventualities here – the market could finish up or down:

• If the market goes up strongly by lunchtime – to 5,325 – we might choose to ride the profit and wait for the market to close before taking our winnings. The market closes the day at 5,340 and we win (5,340 – 5,305) x £10 = £350. A good result!
• If the market goes against us by lunchtime and the quoted spread falls to 5,280 – 5,285, we might choose to close out our position early and cut our losses for the day. We sell at 5,280 and stand to lose (5,305 – 5,280) x £10 = £250. A disappointing result – but at least we didn’t wait until market closed at 5,265 when we would have lost a lot more money.

In practise, most of the major spreadbetting firms also offer a range of limit and stop orders which will automatically execute buy and sell orders on your behalf to take the profit if the market moves favourably to a specified level or limit your loss if the market goes against you.

5. City Index

City Index is a specialist provider of financial spread betting and CFD trading. First established in 1983, City Index is part of IPGL Limited, which is also a substantial shareholder in the world’s leading derivatives broker, ICAP plc.

City Index offers thousands of instruments on the world’s financial markets through a real-time trading platform – including UK, European, US and Far East markets, currencies, commodities and individual equities.

City Index offer two types of trading account, depending on how you want to trade:

• Deposit Account – gives access to the full range of City index instruments
• Limited Risk Account – offers limited markets with all bets covered by guaranteed stop loss orders