What is it?
The spread in question is the difference between the buy and sell prices. Spread betting dates back to the 1970s when it was created by IGIndex to trade Gold, without actually having to purchase large physical amounts of the metal. The number of markets grew slowly, and faster expansion began in the 90s when more competitors entered the arena. The internet has allowed the industry to flourish, although it could never go mass market because not everyone can understand the principles involved, nor wishes to play the markets by this higher risk-return method.
How does it work?
If you expect a price to increase, you buy into it, or go long on the market. Similarly, if you sell or short the market you expect the price to go down. The positions you buy from are at the upper or lower edges of the spread.
If you bought GBP10 a point on the FTSE at a spread of 4050-4055, then any movement of the FTSE above 4055 puts you in profit, GBP10 for every point moved. Alternatively, if the FTSE moved lower to 4040, then you'll be liable for 15 points. The Spread is effectively the margin that the company makes on your trade, so look for narrow spreads.
These bets can be placed for 1 day or over months, it depends on the type of market that you choose. Longer term markets are more likely to see big changes, so the spreads will be wider.
The main advantage of using financial spreads is the large scale profits that are possible. This is because the bet is per point, and the number of points moved can be very large in some cases. So for a low capital risk, you can return a large sum via this leveraging. Of course, the opposite is also true, and Spread-betting is not for the faint-hearted or those that can't manage their risk.
There are detailed guides on Spreads available with all of the companies featured on this page. For disciplined financial markets players, spread-betting accounts are recommended as an effective way to strike up a large position, or to hedge against other financial situations. Headline grabbing wins and losses typically come from spreads markets; there's no cap on the upside but the downside needs to be controlled.
Advantages:
Tax-free - Maybe the biggest benefit is that NO UK TAX is applied to financial spread-betting profits.
Range of Markets - There's a massive variety of bets available - besides the usual large stocks and induces, you can bet on commodities, currencies, interest rates and many more areas.