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Financial spread betting explained

I hope on this page entitled financial spread betting explained, that I can do just that, and try to  provide an introduction to the basics of financial spread betting. So, let’s make a start, and the first point to understand about the market is that all online spread betting instruments are derivatives, as they are ” derived” from another market, so whether it is price for a share, a commodity, or an index, the price will have been based on the price of the underlying asset or financial instrument. So in trading in the financial spread betting market we are essentially trading in derivatives. Now if the term derivatives is new to you, don’t worry – all will become clear as we go through the following pages, but for now, just remember that all financial spread betting prices are derived from something else. The second very important point is that when we trade in derivatives, we are trading a contract, and as in any other walk of life, a contract is legally binding and we have to meet the conditions of the contract if required. Last, but by no means least, all derivative contracts have an expiry date which forms part of the contract. Let me give a couple of simple examples which I hope will make this clear for those of you who have never traded a derivatives contract.

If we take the simple example of buying a share which we all understand ( I hope ) then when we buy our HSBC shares we are actually buying something physical. Firstly we become a shareholder in the company which gives us voting rights, secondly we can expect to receive dividends from the company, and finally we can hold our shares forever, or as long as we like – it is our choice. When we open a spread trading contract in HSBC, none of the above statements are true. Firstly we are not a shareholder and have no voting rights, secondly we receive no dividends ( except as we shall see later on a special type of contract called a rolling daily ), and finally our contract will expire at a future date whether we like it or not ( unless we roll it forward, which again I will explain later!) At this stage you might be wondering why anyone would want to spread bet rather than hold the real asset. Again I hope by the time you have finished this site, all will be crystal clear.

Let’s take another example, but this time a physical commodity such as oil. Suppose you have bought an oil contract – you might be wondering whether you have to take physical delivery of a tanker of oil at the expiry date? Thankfully the answer is no, as you have purchased a spread betting futures contract which means that there is no physical delivery of the underlying asset, which in this case is oil.  All you are doing as a financial spread betting speculator is betting on the direction that an underlying asset will take in the future, so all contracts are, what is called, “cash settled”. In the commodities market itself, physical delivery can, and does take place, as there are real buyers looking for real delivery of the products being traded. In our case however, we are purely speculators who look to back our judgement on the future price, but with no desire to take delivery of the underlying asset – financial spread betting gives us that opportunity.

Finally for those of you who have traded futures in the past you may be wondering what are the advantages and disadvantages of spread betting vs futures trading on the futures market. This is an issue I will look at in detail later, but I hope for now that this has provided a very basic introduction to financial spread betting.