Spread bets have become a popular short term trading product in the UK and Ireland, used by traders to make money off very short term movements in the prices of financial markets.
You can use financial spread bets to trade a wide range of different financial markets. Traders use spread bets to trade the price of not just stock market indexes and shares but other markets like currencies and commodities.
Here are some of the different types of spread bets and the markets they can help you to access:
- Commodities: Commodity spread bets let you trade the changing prices in the major global commodity markets. The most popular tend of the crude oil and gold, but you can also bet more esoteric markets like natural gas, soy beans or even milk. Not all brokers will offer all commodity markets, and it is important to research a market thoroughly before placing any bets.
- Foreign exchange (forex): This is a market for more advanced traders as forex markets can be more volatile and can require higher risks to trade effectively. We do not advise new traders to trade FX markets. It is better to learn with index-based bets (see below). FX markets are distinguished by their 24 hour nature – they are always open.
- Index spread bets: Most traders learn their craft trading against the price of the main global stock market indexes. Among the popular indexes are the FTSE 100 and S&P 500 (the main US stock market index). Some brokers now make these markets available outside of normal trading hours, thanks to the availability of futures markets that are open around the clock.
- Interest rate bets: There is less demand for spread bets based on interest rates at the moment (the rates at which particular currencies pay interest in the interbank market). This is partly because interest rates have remained steadfastly low and also because of scandals about the way in which interbank rates have been rigged by major banks. Still, interest rate bets are one way for traders to take a view on whether they think rates are going to go up or down in the near future.
- Share spread bets: Many traders like to bet on share prices rather than buying and selling actual shares. This is because they can use margin to make (or lose) more money on the trade. They are being lent money by the broker to raise their real position on that share in order to increase their potential profits. Spread bets can also be used to take a short position against a stock price – you expect to make money if the share price goes down in value. Spread betting is arguably the easiest way to make money from falling share prices – e.g. during a bear market.
Do I own my spread bets?
This is an interesting question, often asked by traders who are used to owning shares. Your spread bet is not something you can sell to a third party: it is a contract between you and your broker. The brokerage lends you money in the form of margin to technically increase the size of your trade, and augment the size of your profits – or your losses – and also charges you a fee for this. But you don’t actually own anything. A spread bet on Brent crude oil is not like a futures contract – it does not entitle you to take delivery of a barrel of oil!
Next time we will look at how financial spread bets work in practice. You can also find out more from our range of investment guides which are free to download.