How Spread Betting Works and How to Trade It

Spread betting is a type of short selling that allows individuals to participate in the markets but without taking on significant risk. Essentially, you’re borrowing money to make a bet that something will happen that will provide a positive return on investment. You may be familiar with the concept behind spread betting if you’ve ever watched BBC’s popular show, The Apprentice, in which contestants were given the opportunity to spread bet on the outcome of various business challenges. The idea behind spread betting is actually quite old – back in 1785, a man by the name of William O’Grady started a business that would later become O’Grady’s Finishing School for Young Ladies. The school specialized in teaching young women how to spread bet. These days, you can join nearly any online brokerage to open a spread account, and from there, it’s easy to explore the world of spread betting and understand the concept behind most major brands. 

What is Short Selling?

We mentioned short selling above, and as the name would suggest, short selling involves the sale of a security with the intention of later covering the position at a cheaper price. In other words, you’re taking a long position (in this case, buying) and then hedging your position (or speculating) with a short one (or more). Short selling offers a bit of insurance to buyers of equities because if prices decline, you can cover your position at a lower cost.

Why would you short stocks? Well, if you believe that a company’s value is overinflated, you may feel inclined to take a short position in order to profit from any drop in price. In theory, at least. In practice, things are a bit more complicated. It all depends on what type of stock you’re trading and whether you have enough money to cover both your long and short positions. It’s also worth noting that short selling is generally considered a very high-risk activity because if the market perceives you as a cheat, you could face severe punishment. That’s why many brokers won’t offer short-selling services to their clients unless they’re willing to accept higher fees than usual for undertaking such a dangerous activity.

The Basics Of Spread Betting

Before we get into the nitty-gritty of how spread betting works, let’s discuss some of the most essential points that need to be taken into consideration. First, you must ensure that you’re using a reputable broker, preferably one that is regulated by a governing body (such as the CFTC), which ensures that your personal information is kept confidential.

The second point to make is that you must openan account with a brokerage that offers spread betting, preferably one that has an A+ rating from the Better Business Bureau. Second-best would be an A rating. Also, make sure you look for brokers that are member of major trading associations, such as the CFTC, the SEC, and the NASD. Members of these organizations must adhere to the highest standards of integrity, professionalism, and responsibility.

Once you have your account set up with a reputable brokerage, it’s time to move on to the fun part – learning how to trade! But before you start buying and selling securities, it’s essential that you familiarize yourself with some of the more common terminologies used by market professionals. For example, when referring to the overall market (or stock market) the professionals usually say that this is the market, the bears (short sellers) are loading up on the market (short buying), and the bulls (longs) are looking to short sellers’ says (or expects) the market (long buying). So, in theory at least, you’re buying low and selling high – just like the bulls (longs) do in the casino (gambling) version of spread betting!

How Do You Place A Bet?

Now that you’re equipped with all the basics of short selling, how do you actually place a bet? The process is fairly simple. First, you need to decide which security you’ll be trading (or investing in) and then find the equity’s price on the BATS (formerly the New York Stock Exchange’s) open market. You can use websites like Bloomberg to check equity price actively (allowing you to watch tickers or stock price movement live), but many spread bettors prefer using the NYSE completed ticker for just about any type of trading they do. In the completed ticker, you can also find key fundamental analysis such as dividends, earnings, and book value (among others).

After you’ve found the equity’s price, it’s time to open a position in the security you chose (or are investing in). Just remember: short selling is considered a very high-risk activity and must be undertaken only with the appropriate level of education and training. Short selling doesn’t have to be complex; it just has to be profitable. Otherwise, you may find yourself facing the alternative of losing your money (with theirs being the loss) or being forced to close your account. So, it’s important that you take the time to learn how to trade and only trade with a carefully chosen team of professionals you can trust. 

When Do You Close Your Position?

Now that you’ve established a short position in some equity(s), it’s time to decide when you’ll close your position. If you’re wondering, “just close it when I’m ready,” then you may have gotten into the habit of closing positions quickly (and unnecessarily), which is something you must break and learn to avoid. Always, never close a position without first taking care of the following: