DEFINITION

Spread trading (AKA Spread Betting)

Spread trading is a way to speculate on financial markets, and perhaps the simplest way to do so.

You can choose from plenty of markets including stock indices, shares, commodities and forex, and you don’t have to own whatever it is you’re trading either. All you need to do is speculate on whether the price will rise or fall, and if you’re correct, you’ll make a profit. On the flip side, you’ll suffer losses if the market moves in the opposite direction.

Spread trading - Quick links:

So, what is 'the spread' in trading?

When making a trade, you’ll be given a buy and a sell price. If you think the market price will rise, you buy (aka go long). Expecting it to fall? Then you sell (aka go short).

The spread is the difference between the buy and the sell price. This determines how much it will cost to make the trade — the smaller the spread, the cheaper it will be. If you’d like to see all of this in context, head over to step 4 on our trading simulator.

It’s important to bear in mind that spreads can be either fixed or variable. Fixed spreads don’t change but variable ones have the potential to rise if there is market volatility, meaning trading costs can become more expensive than they were when you opened your position.

Hang on! I’m a new trader, is this right for me?

Many new traders aren’t sure what strategy to follow when they first get started. As spread trading is arguably the most straightforward way to speculate on the markets (especially compared to complicated financial instruments like CFDs), this is certainly worth exploring.

You can trade in the currency of your choice and also choose exactly how much you want to stake per point, giving you total control over how much you want to trade. This means you can always stick to your personal risk profile.

BUY-SELL SPREAD

Why do I keep hearing about the bid-offer spread?

A bid-offer spread is just another way to present the buy-sell prices we’ve already talked about. If you think a market is going to decline, you would look at the sell price which would be listed under ‘bid’.

The buy price (what you’d pay if you predict a market will increase in value) is greater than the sell/bid price and will be listed under ‘offer’.

Some platforms will use a bid-ask spread instead, and this is also the same thing.

3 ways the buy-sell spread can be impacted

Liquidity

If whatever you’re trading has plenty of liquidity, it can be easily bought and sold and will often have a smaller spread.

For example, the most popular currencies in the forex market (like the US dollar and British pound) have very small spreads because these currencies are widely considered the most liquid assets out there.

EXAMPLE

Spread trading in action

Say you want to speculate on the price movements of the UK 100 Cash (aka the FTSE 100), you might get this buy-sell spread:

  • SELL: 7424.8

  • BUY: 7425.2

  • SPREAD: 0.4PTS

And you expect the market to rise, so you buy £5 per point for 7425.2.

How a trade might play out

A WINNING SPREAD TRADE

The market has risen and you decide to close your trade once it has gone up by 10 points. There are new prices:

7434.8 to sell and 7435.2 to buy.

You need to trade in the opposite direction to claim your profit, which means you’d sell £5 per point at 7434.8. Now, you’ll bank the difference between your opening and closing trades:

7434.8 - 7425.2 = 9.6

And as you put up £5 a point…

9.6 x £5 = £48 profit

A LOSING SPREAD TRADE

Unfortunately you got it wrong and the market ended up falling by 10 points, and these are the new prices:

7414.8 to sell and 7415.2 to buy.

As you have gone long, you now need to sell £5 per point at 7414.8. This is how your losses are calculated.

7414.8 - 7425.2 = -10.4

And as you put up £5 a point…

-10.4 x £5 = £52 loss

How a trade might play out

A WINNING SPREAD TRADE

A LOSING SPREAD TRADE

The market has risen and you decide to close your trade once it has gone up by 10 points. There are new prices:

7434.8 to sell and 7435.2 to buy.

You need to trade in the opposite direction to claim your profit, which means you’d sell £5 per point at 7434.8. Now, you’ll bank the difference between your opening and closing trades:

Unfortunately you got it wrong and the market ended up falling by 10 points, and these are the new prices:

7414.8 to sell and 7415.2 to buy.

As you have gone long, you now need to sell £5 per point at 7414.8. This is how your losses are calculated.

7434.8 - 7425.2 = 9.6

And as you put up £5 a point…

9.6 x £5 = £48 profit

7414.8 - 7425.2 = -10.4

And as you put up £5 a point…

-10.4 x £5 = £52 loss

In both scenarios the Trade Nation charge, a fixed spread of 0.4 points, doesn't change. This is why it is important to trade at a competitive fixed spread allowing you to reduce your transaction costs and maximise your returns.

KNOW THE COSTS

What are spread charges?

The spread determines how much you will be charged to make a trade, with smaller spreads being the most cost-effective.

But remember, spreads can be either fixed or variable! This is very important if you want to keep your trading costs as low as possible.

  • Variable spreads can change at any time, so if the market you’re trading on becomes volatile, the spread will widen and trading costs will increase. What if the spread is widest at the point you need to close a trade? As this is out of your control, you may end up paying more than planned and have diminished returns as a result.

  • Fixed spreads are just that, fixed. They remain unchanged regardless of what happens in the market. This allows traders advantages such as more transparency, lower costs and safeguarding against volatility.

This is why we are very pleased to offer low fixed spreads here at Trade Nation.

No matter what happens in the markets, you can be certain that your spread will never change. You can enjoy minimal costs, maximum returns, and total transparency. And on top of that, we offer a unique loyalty bonus where we return up to 25% of the spread you pay every month*. It’s up to you whether you want to withdraw it or trade it, and there are absolutely no terms, conditions or questions to worry about.

However, remember that trading is never risk-free and losses are a regular occurrence. Make sure you always understand the risks before taking a position, and only ever trade with what you can afford to lose.

As well as low fixed spreads and a loyalty bonus*, we also offer a range of risk management tools to help you trade responsibly.

We help you to learn spread trading on our easy-to-use platform. Use our free trading simulator to try out different trading scenarios and learn the essentials, or sign up for a free practice account where you can test out your strategies without risking any money. This also gives you access to lots of useful resources that will teach you more about the ins and outs of spread trading.

The final word from David, Senior Market Analyst

3 key features of spread trading

There are 3 key features of spread trading...

1. Spread trading gives you the opportunity to profit from the rise, or fall, in the price of a financial instrument. This could be on a stock index, for instance, a currency pair or the price of gold.

2. With spread trading, you deposit a small percentage of the total value of your trade to control all of it. This means you’re trading with leverage.

3. You can also trade in a size that suits your risk appetite, something that isn’t always possible when using other financial products.

At Trade Nation you have access to a huge range of markets from one single account. This gives you full control of your own trading from our easy-to-use platform.

The costs are transparent. There are no commissions or fees to pay. At Trade Nation we make money from the difference between the buying and selling prices of each product. This is called the spread. Unlike many other providers, our spreads don’t increase just because markets get volatile. This is important as low fixed spreads help keep your dealing costs down and so maximise the returns from your trading.

HOW TO START SPREAD TRADING WITH TRADE NATION

1. Get a feel for trading with our simulator

Ideal for beginners, our free simulator allows you to practice trading with no commitment, no financial risk and no sign up needed. Simply follow the steps and see how much you would have profited or lost had you made the trade.

2. Create an account

You can open a full account to start trading immediately or explore the ins and outs of our platform with a free practice account.

3. Explore our markets

Log into your account and open the trading platform. Here you will see all the markets we offer including forex, indices, shares and more.

4. Make the trade

Choose the asset you want and make your trade.

Join our nation of traders

Financial spread trading comes with a high risk of losing money rapidly due to leverage. You should consider whether you understand how spread trading works and whether you can afford to take the high risk of losing your money.