Spread betting is, as the name suggests, a way of betting on the performance of financial markets and guessing how they will fare.
Rather than actually investing your money in stocks and shares and hoping they will do well), with spread betting you guess whether they will go up or down, and can bet on whether their value falls or rises.
Spread betting companies propose a sell price (which is low) and a buy price (which is higher) for shares being traded on the market - it's the difference between these two values which determines what the spread is.
Things can change in the blink of an eye, so you need to be prepared to take losses on the chin and play the long game to profit from spread betting - risk and betting go hand-in-hand, so make sure you're ready to accept the fact that you might get out less than you put in.
How do you make money from spread betting?
You are essentially betting against the spread betting company, here is an example of how the process works:
The spread betting company predicts how a company's shares will perform, offering two values - for example 19/20 (this is the spread). 19 is the sell price, 20 is the buy price.
If you think the shares will do better than 20 you buy.
If you think the shares will fall below 19 you sell.
If you bought £10 for each point or pip above 20 and the shares go up, you'll make a profit (if they go up by 10 pips to reach 30, you'll make 10 x £10 = £100). If you bought and they go down, you'll lose money for each point or pip below 20 (if they go down by 5 pips to 15, you'll lose 5 x £10 = £50).
If you sold £10 for each point or pip below 19 and the shares go down, you'll profit (if they go down by 10 pips from 19 to 9, you'll make 10 x £10 = £100). If you sold and the shares go up in value, you'll lose out for each pip above 19 (if they go up by 15 to 34, you'll lose 15 x £10 = £150).
This is a simplified example of how spread betting works, but it shows that you can both make money on shares falling and lose out on shares going up in value - so remember, when you spread bet you make or lose money based on your speculations about how shares will perform.
What's a spread betting demo account?
As the world of spread betting can seem daunting at first, companies will often offer you the chance to open a demo account, before opening a real one.
These allow you to get some practice without contributing any of your cash - essentially a virtual spread betting experience that lets you get used to the process, without any of the risk involved with actually betting.
What's the best spread betting demo account?
Many demo spread betting accounts come with a range of trading features that mirror real accounts, such as real-time, virtual and mobile trading - there wouldn't be much point taking out a demo trading account UK if they didn't offer a genuine experience after all!
Types of demo accounts
The types of accounts you can open vary, as you can choose to bet on a range of markets from global indices and stock exchanges to commodity markets such as oil, gold and coffee, as well foreign exchange (forex) markets. This gives you the chance to try out a number of different markets, so that you can get to grips with how spread betting works and practice placing spreads in the markets you want to bet on.
Most companies will offer you the chance to either choose short-term betting options, such as daily bets (which expire when the trading day finishes) and daily rolling bets (which are subject to a charge for keeping them open overnight), or longer-term ones.
Some extended spreads, such as quarterly bets, do have an expiry date but don't charge rolling overnight fees, so make more sense if you're looking for an extended betting option.
You'll need to look for a demo account that allows you to practice placing the type of spreads you'll eventually want to invest in.
How much money can you use?
If you open an account with certain providers you may get a set amount of virtual money to use while using the demo version - look for an account that lets you practice using similar amounts to what you have to invest. Some companies also offer limited risk options and beginners accounts, which allow you to protect yourself from risk and start off betting small stakes (pennies, not pounds).
Spread betting markets
When you compare spread betting demo accounts you'll notice that each one provides a different rolling daily spread value across key markets, such as the FTSE 100, Wall Street and GBP/EUR trades.
In other words, the actual spread offered by each company - both for their spread betting demo account UK and real products - varies, with some offering tighter spreads than others.
Rolling daily spreads represent contracts that can be kept open for as long as you like - but they are subject to overnight fees for every night that you keep one open - meaning they are probably best as short or medium term trading options.
Making a demo spread betting account comparison can help you work out what kind of buy/sell spread margin suits you best and play around with a market simulation, without putting your money at risk.
There's a lot to spread betting, so it's essential that you do your research before opening an account.