As with most things, one of the best ways to understand the process is to see some trading examples. In simple terms, a spread bet is a way for investors to make a forecast about the future price direction of an asset and then to profit if that forecast is correct. Spread betting companies now offer a large array of assets that can be traded. These include individual stock shares, major stock indices, currencies (forex), commodity assets, interest rates, treasury bonds, and options. Gains and losses in these trades are measured based on the number of point that are gained or lost and then this point value is then multiplied by the size of the original trade.
The Bid and Ask Price
When you are placing a trade, the first step in the process (after choosing your trading asset) will be to determine whether you think the value of the asset will increase or decrease in value. There is a variety of ways to make this type of determination and when you look at your trading station, you will find two prices for each asset. These are called the Bid and Ask prices. The lower price is the Ask price, and this is the price at which the asset can be sold. The higher price is the Bid price and this is the price at which the asset can be purchased. The difference between these two prices is the Spread, and this is essentially the cost of the trade that is paid to your broker.
Calculating Gains and Losses
Once you know if you plan to buy or sell the asset, you must then set your trading size, which is essentially the amount of money that you are putting at risk in the trade. The larger the trade size, the greater the amount of money that can be gained or lost. The exact amount of money that is gained or loss will depend on the change in the number of points between the time the trade was opened and the time it was closed. So, for example, if your trade was valued at $10 per point, and the price changed by 10 points while it was open, the trade would win or lose $100. Whether the trade wins or loses that amount will depend on whether or not the predicted price direction was correct.
Stock Trading Example
Let’s say you think the price in Google stock rise in the next month. The stock’s current price is quoted at $600/$605 by your spread betting broker. Since we are buying, we look at the Bid price, which is the higher number and shows that we will enter the trade at $605. Each “point” in this trade will be equal to 1 Dollar in price change. If we are looking for a trade equal to 1,000 shares, we will be trading at $10 per point. Also, we will open this trade with 10% margin (meaning that we will only deposit 10% of the full trade size).
Next, let’s assume that our original forecast in correct and the price of Google stock does increase after we buy it. The price changes from $605 (Bid price) to $635 (Ask price), and we choose to close the position and take profits. To calculate the profits, we subtract the closing price from the opening price (635 – 605 = 30). Here we can see that our “point gain” is 30. Since our trade value was $10 per point, we can see that the total trading gain is $300.
Forex Trading Example
In the next example, we will look at a Forex trade, because the point values are determined differently. Assume we believe that the Euro will rise against the US Dollar, which means an upward move in the EUR/USD forex pair. Our broker shows the Bid/Ask prices at 1.3550/1.3553. Since we are buying, we look at the Bid price, which is 1.3553, and this is our entry level. Again, we will make our trade size at $10 per point using 10% margin.
Point values in Forex pairs are determined by the last decimal place, to if the price moves up to 1.3573, we can see that our trade has made a point gain of 20 points. Since our trade size was $10 per point, we have made $200 in the position.