Downside 3 losses are unlimited

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If you don't set a guaranteed stop loss when opening your bet (which costs you even more on the spread) your losses aren't limited to your stake.

We'll discuss all of the above shortly. But first I want to show you how easy it is to spread bet (either shares or indices). The best way to describe spread betting is to dive right in and look at an example.

s- Example: long; held to bet expiry -

BSkyB shares are going up and you want some of the action. The shares are currently priced at 500-501 (500 to sell 501 to buy) in the stock market.

However, your ISA is maxed out, and you only want a relatively short-term exposure (say three months), so you decide to take out a spread bet.

You phone the spread betting company (or use its web site) and find the BSkyB spread betting price is 500-505 (i.e. 500 to sell, and 505 to buy).

• If you think the shares are going down (you want to short them). Then sell at 500p.

• If you think the shares are going up (you want to go long). Then buy at 505p.

In this case, you think BSkyB shares are going up, so you would "buy

The next decision is how many pounds a point you want to stake. If you're very optimistic you'll bet a high amount, but if you're more cautious (and risk-averse) you'll bet a low amount. In this case, let's say you bet £10 a point.

The table shows what your profit will be, depending on the BSkyB share price at expiry of your bet.

For example, at bet expiry if the BSkyB share price is 530, you will make £250. (This is a cash profit that would be deposited in your spread betting account.) But if the BSkyB share price was 485 at bet expiry, you would lose £200.

The formula to work out your profit is simply:

stake amount x (final price - price bought at)

So, if the final price is 515, the calculation is:

at 505".

BSkyB

Profit

price

(£)

480

-250

485

-200

490

-150

495

-100

500

-50

505

0

510

+50

515

+100

520

+150

525

+200

530

+250

535

+300

If, instead of betting £10 per point, you had bet only £1 per point, then the profit numbers in the above table would be divided by 10. Or, if you had bet £100 per point, then the profit numbers in the above table would be multiplied by 10.

It's usually easiest just to think in terms of numbers of points made or lost. For example, if the BSkyB share price is 520 at bet expiry, then you've made 15 points (520 - 505). Then simply multiply the points you have made by your original pounds per point.

Example: short; held to bet expiry -

In the previous example we looked at the case when you were bullish (optimistic) on BSkyB and so went long (i.e. you bought a spread bet). In this example, we'll look the case where you are bearish (pessimistic) on BSkyB and so will short it (i.e. you will sell a spread bet).

To quickly recap, prevailing prices are:

• The share price quote is: 500-501

• The spread betting quote is: 500-505

In the first example, you bought the spread bet at 505. This time you will sell at 500. Again, you will bet £10 per point.

The table shows what your profit will be, depending on the BSkyB share price at the expiry of your bet.

As you can see, the profit profile of the trade is the reverse of that in the first example. If the share price falls to 490 at bet expiry, then you make a profit of £150. But if the share was at 535 at bet expiry, you would lose £300.

BSkyB

Profit

price

(£)

480

+250

485

+200

490

+150

495

+100

500

+50

505

0

510

-50

515

-100

520

-150

525

-200

530

-250

535

-300

The general formula for calculating profits for short trades is:

stake amount x (price sold at - final price)

So, if the final price is 495, the calculation is:

As before, just think in terms of points made or lost. And then multiply that by the pounds per point to get the cash profit. ___

C Example: long; closed before bet expiry -n

All spread bets have a date at which they expire. At expiry the bet is settled at the prevailing price in the underlying market. In the first example above, if the underlying market (BSkyB shares trading in the stock market) was priced at 520 at bet expiry, the spread bet is settled at 520. Expiry of a spread bet can be considered like the end of a horse race - when the result is known, and the winnings paid.

However, unlike a horse race, spread bets can be closed out before expiry.

Think about that for a moment - that's quite a useful facility.

Imagine placing a bet on a horse race and after two bends your horse is out in front. Wouldn't it be good if you could stop the race right there, and collect your winnings immediately. But you can't, you have to hold on to the end of the race, and possibly see your horse being overtaken by others.

But this isn't a problem with spread betting. You can, effectively, "stop the race" whenever you like. This is what is meant by closing out at expiry.

This can happen because the spread betting firms are quoting prices all the time - even after the "race has started".

Let's look at the first example again.

You bought the spread bet at 505 for £10 per point. After a few days the spread bet price is 515-520. The price has moved up and you want to close your bet immediately and bank your profit, instead of waiting to expiry of the bet.

No problem. You close your bet by making an opposite bet. In other words:

1. if you bought the bet originally (i.e. had a long position), you would close it by selling the bet.

2. if you sold the bet originally (i.e. had a short position), you would close it by buying the bet.

In this case, you are long, and so you would close the bet by selling the bet (at the same pounds per point: £10). To recap, the spread bet price is 515-520, and so the selling price is 515.

The table below summarises the prices and action taken to open and then close out a bet before expiry.

Market action

Value

original spread bet price

500-505

spread bet bought at

505

stake (pounds per point)

£10

spread bet price a few days later

515-520

spread bet sold at (effectively closing the bet)

515

points made

10 (515-505)

profit

£100 (£10 x 10)

So, we can see that this facility is very powerful indeed. It allows the spread better to get out of the market before bet expiry.

You can't do that on the horses!

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