In spread betting the ‘Spread’ is in effect the cost charged to a trader for entering and exiting a position. The profit or loss made on a particular trade does not impact Spread.
On index, fx and commodity trades the Spread the is difference between the bid – offer price multiplied by the amount staked. For equities, it is the amount added around the underlying market bid – offer prices.
By way of an example, a trader goes long £10 a point on UK
100 at 6,652.1 – 6,652.9 (a fixed spread of 0.8 pts), that means they enter the trade at the offer price of 6,652.9. The market moves 10 points to 6,662.1 – 6,662.9 and the trader decides to close the trade at the bid price of 6,662.1. That has locked in a profit of £92 (6,662.1 minus 6,652.9 multiplied by £10 staked). How come its not £100, the market moved by 10 points and the stake was £10? The £8 difference is the Spread, 0.8 multiplied by £10. This is what the market (the provider can hedge your position) charges traders to make a trade.
Just to demonstrate what happens when the market moves against the trader: the same trade is placed, going long at 6,652.9. The market falls 10 points to 6,642.1 – 6,642.9 and the trader decides to exit at the bid price of 6,642.1. That is a loss of £108 (6,642.1 minus 6,652.9 multiplied by £10 staked). £100 from the underlying move and £8 from the Spread charged.
Spread doesn’t change whichever way the markets move, what is important is to make sure you trade at a tight spread, all things being equal this will reduce your transaction costs.
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