Useful Terms

Posted By Robert On Saturday, December 21st, 2013 With 0 Comments

Spread betting: Spread betting is a way to wager on the outcome of an event, but not in the ‘fixed odds’ way that traditional betting is usually carried out. Instead spread betting allows users to place a bet on the extent to which an outcome will occur. So if you place a £1 per point bet (buy) on the FTSE 100 and it goes up 10 points, you will win £10 (not allowing for the spread), whereas traditionally you would be offered fixed odds on, for example, whether the FTSE 100 will go up or down.

Buy: Buying an asset means you are betting that it will increase in value. For this you will pay the higher price of the spread and you will also specify the amount per point that you bet.

Sell: Selling means you are betting that the price will decrease. You will sell at the lower end of the spread and specify the amount per point that you are betting.

Point: A point refers to the unit of the asset for which the spread bet is calculated. So a point for a spread bet on a UK listed share will usually be one pence. So if you bet £10 per point, and the market price of the share increases by 10 pence, you will have won £100.  This can also be a dollar cent, euro cent etc.

Pip: A pip is a decimal point, measured to four decimal places and is usually used in forex trading. So £1.50 could be written as £1.5000 and if this increased by five pips it would increase to £1.5005. Spread betting on forex is usually done by pip, as opposed to point.

Spread: The spread is the difference between the buy and sell price of an asset, and this is the ‘charge’ that the spread betting company is taking from users. So if you wanted to trade a share that has a market price of 150, the buy price may be 151 and the sell price 149. So if you bought at £10 per point and sold immediately you would have bout at 151 and sold at 149, therefore the price has fallen by two points and you would lose £20, or 2 points times by the bet of £10 per point. It is therefore best to trade using a company with the smallest spreads, as this will either mean more profit or smaller losses.

Forex: Forex simply refers to Foreign Exchange or currency trading. This is a very popular market with traders and spread betters, as it is very liquid and fast moving. Currencies are traded against each other so you may trade the euro against the dollar and you are taking a position on whether one will increase or decrease in value against the other.

Index: An index is a method of measuring a section of the stock market. So the FTSE 100 is an index, which measures the top 100 companies listed on the London Stock Exchange, and the index is compiled by a company called FTSE. Indexes give a broad view of a section of market, and can also be traded.

Commodities: Commodity is a term with a wide range of possible uses, but it essentially means goods. So when someone talks about trading commodities, they could be talking about trading anything from gold to sugar.

Stop loss: A stop loss is a command, which automatically tells the trading platform you are using to buy or sell once the price reaches a certain level. So say you put on a £1 per point bet at 100, you could set a stop loss at 90, so if the market goes against you, your maximum loss should only be £10, as your position will close at 90.

Guaranteed stop loss: Sometimes stop losses do not work if the market ‘gaps’ up or down. With the above example this would occur if the market price was never actually 90, but ‘gapped’ down from 91 straight to 89. In this case the stop loss would not be triggered, as the market price never was 90. By using a guaranteed stop loss you can avoid this, as if the market goes below 90, even if it misses out 90, the company will close your position as though it did go to 90. However using this option usually involves having a slightly wider spread.

CFD: A CFD or Contract For Difference is a financial derivative, which also allows individuals to bet on the price of an asset. It involves to people, a buyer and a seller, and the buyer agrees to pay the seller the difference between the value of the asset at the start of the contract and the value at the close of the contract. If the difference is positive then the seller pays the buyer, if the difference is negative the buyer pays the seller.

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