The FTSE 100 is an index of the 100 most valuable public companies listed in the UK. The value of the index is usually commensurate with the general health of the wider economy, but it can be subject to the hourly ebb and flow of free market competition. Its value can go up and down on a day-to-day basis, as well as part of a much longer term trend. Spread betting with IG and others offers people the chance to bet on the direction of the index, which can be a far cheaper and more accessible alternative to share trading.
How it works
A company specialising in financial spread betting will offer a buying and selling price – based on the actual value of the FTSE 100 at that moment. For instance, if the current value stood at 6500, the buy/sell price offered by the spread betting specialist could be stated as 6504/6496; the ‘spread’ would be the difference between the buy and sell prices – in this case, 8 points. This means that to bet on the value of the FTSE going up, you would need to ‘buy’ at 6504. However, if you believed that the value of the FTSE 100 was due to fall, you would ‘sell’ at 6496.
Now, for the sake of argument, let’s say you decided that the FTSE 100 was about to increase in value. You bought at 6504 for £10 per point, and within a few hours, the FTSE 100 was at 6509. If you had decided to sell at that point, you would have made a 5-point gain, which is the difference between the ‘buy’ price and the current value. Therefore, you would stand to make £50. However, if the FTSE had dropped in that time to 6500, you would be facing a 4-point loss, and selling at that point would lose you £40.
Alternatively, let’s say you decided that the FTSE 100 would decrease in value. You made your bet at the ‘sell’ price of 6496 for £10 per point. Within a few hours, the FTSE has fallen to 6490, and you make a 6-point gain – that presents you with a £60 return. However, if the FTSE 100 had stayed the same at 6500, that would present a 4-point loss – the equivalent of £40 if you were to cut your losses at that point.
What are the advantages of spread betting
There are several spread betting services in the UK, and they give people on average incomes a chance to profit from the financial markets in a way that share dealing can’t. The ability to go ‘long’ (predicting a rise in the value of the FTSE 100) or to go ‘short’ (predicting a drop in value) means that profits can be made whatever the current market trends are. Most companies make their profits solely from the ‘spread’, so there are usually no commissions and fees involved. However, perhaps the biggest advantage is that people can get involved in stock markets with only a few pounds. Unlike the earnings from traditional share trading, earnings from spread betting are not taxable in the UK. Read more here on the question, are personal injury settlements taxable.
Are there any risks involved?
The volatility of the markets can result in very sudden value or price fluctuations that veer far from the ‘spread’. This can result in huge gains, however, if you bet the other way, you could stand to lose a fortune. Fortunately, you can put a limit on your losses by imposing a stop loss order on the transaction, which will automatically ‘cash’ you out of the transaction when the actual market value strays too far from the ‘spread’ – a figure that you can determine from the outset.
There is something rather exhilarating about ordinary people being able to wheel and deal in the financial markets, and that is why spread betting on stocks and shares is becoming increasingly popular in the UK.