In the previous two articles, we looked at the leveraged nature of spread betting as well as the differences between spread betting and traditional share trading.
In this final post on ‘what is spread betting?’, we take a closer look at the practical aspects of trading UK shares using a spread betting account.
Consider the following chart -:
Suppose you came to the conclusion that the share price is likely to rise. In this example, we will assume that the last price that the line graph is next to is 145 .
Suppose also, that you have opened a spread betting account and wanted to open a spread bet on this company, rather than buy shares in the traditional way through a stock broker.
What would you need to do?
1. Search for the company you want to spread bet
Your spread betting provider’s website will have a search box into which you can enter the name of your chosen company. Some companies have similar sounding names, so be careful that your search results reveal the correct company name.
2. Open the spread bet
The next page should include a list of spread bets (usually a choice of 4) that you are able to place. Assume that in this instance you simply open the last spread bet which shows the following prices:
(sell) 144 – 146 (buy)
To open the spread bet, you would buy it at the price of 146.
3. Determine your pounds per point
OK, so we are getting a little bit more technical here, but its quite simple, honest.
Pounds per point means how many pounds sterling you want to put towards each spread bet. In traditional share trading you buy shares. How many is up to you 10, 100, 1000, 10000 shares.
In spread betting, £1 per point is equal to buying 100 shares so if e2v rises by 10 pence to 155 and you placed a spread bet at £1 per point, you will be showing a profit of £10 in your spread betting account:
10 points x £1 per point = £10.00
4. Set your stop loss
Every trade I place always has a stop loss.
A stop loss is a price level at which you order your spread betting provider to close a spread bet automatically. This is to ensure that you do not hold onto a losing spread bet for a long time. The longer you have a losing spread bet open, the more money you lose. It therefore makes complete sense for your spread betting provider to close losing spread bets for you, even when you are not logged into your spread betting account.
For the purposes of this example, assume a stop loss at 118. (Have another look at the chart above of e2v to see why a stop loss would be set at 118.)
5. Confirm your trade
At this stage, there is nothing left to do except to confirm your trade.
Most spread betting firms have a similar looking button for this that will have the word trade or confirm that you will need to click.
OK, so you have read this post as well as ‘What is Spread Betting? – Part 1‘ and ‘What is Spread Betting? – Part 2‘ and are non the wiser. That’s OK. Spread betting and stock market participation in general can be confusing and sometimes it does not help when you are reading posts or books about trading UK shares. Sometimes it helps to go that one step further and actually make spread bets on the UK stock market without the risk of losing any money at all. Which brings me neatly to my challenge.
The challenge is to do the following:
1. Open a virtual or demo spread betting account only.
2. Open a spread bet on a UK listed company of your choice.
3. Set the stop loss.
4. Close the spread bet 1 week after you have read this post.
The only rule is that you do not use or put at risk any money whatsoever!
It does not matter whether you end up with a profit or loss when you have closed your spread bet. What is important is that you go through the motions of opening and closing a trade on a UK listed company.
Yes you will be trading with fake money and yes it is not the real stock market. But why would you want to trade with real money when you are new to spread betting? That’s like driving a car without taking any driving lessons.
Some spread betting firms offer a demo account when you sign up with them for free. One website I can recommend is Ayondo. Here, you can have virtual trading portfolios on spread bets as well as shares and other financial instruments.
The final part of the challenge is to make a comment at the bottom of this post about how you got on with your first spread bet. You can ask me anything you like and I promise to respond to your comments.
Good luck and thank you for reading these series of posts.