Explaining the Spread: Underlying Price vs The Spread

The Spread is unsurprisingly one of the key factors in Spread betting. It is also one of the reasons why Spread betting is relatively simple and hassle free. When it comes to trading in physical shares there are lots trading fees and commission that need to be paid (these include stamp duty, capital gains and brokerage fees). By contrast when undertaking a spread bet all the costs are calculated into the spread offered by the spread betting company. All the trader has to take into account is the price movement in relation to the spread on offer.

The Spread is derived from the overall underlying price. This is why Spread betting is a form of derivative trading, as the Spread is derived from the Underlying price. If Big Bank PLC is trading on the Stock Exchange at 100p, a Spread betting company may offer a bid-offer price of 99p-101p for the day. In this case the Spread is 2p. This spread cost is where the spread betting companies make their profit, it is also where all the costs of your trading are covered. How the bid-offer spread is calculated depends on company to company but is often calculated as small percentage of the market price. 

How quickly the spread bid-offer changes depends on changes in the underlying market. If Big Bank PLC share prices moves 5p in an hour it is likely that the related Spreads will move by the same amount. When it comes to quarterly futures it is possible that the effect could be even sharper. Many of the Spreads on offer will often radically change due to the levels of volatility in the market, this is especially true when price sensitive information or announcements come to light. 

This makes shopping around an attractive proposition while small differences in Spread’s appear to not make a huge amount of difference. But getting a good deal on your spread can make all the difference as it can be the difference between a profitable and non profitable bet. Even tiny differences in spread’s can make huge differences when the value of the spread bet is particularly large. 

Part of The Beginners Guide To Spread Betting



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