Spread Betting Tutorial

Index

• What is a bid-offer spread?
• Trading stock indices with TM Fleming Spreads
• Trading individual shares with TM Fleming Spreads
• Trading currency futures with TM Fleming Spreads
• Stop-loss facilities
• Guaranteed orders
• Roll-overs

What is a bid-offer spread?

TM Fleming Spreads will normally quote a two-way dealing price on the financial instrument of your choice. As a FIRST STEP you should enquire about the levels at which you can buy or sell any particular instrument.

Example : Dow Jones December is quoted at 10765-10775

Which means :

The first price, 10765 = bid price = price at which you can SELL the instrument

Selling the instrument is also referred to as “going short”

The second price, 10775 = offer price = price at which you can BUY

Buying the instrument is also referred to as “going long”

Each quote applies for a specific market or instrument – Dow Jones -, and for a specified time or date in the future – December contract -.

The difference between bid and offer prices is commonly called the spread.

TM Fleming Spreads current financial spreads can be obtained in respect of a multitude of markets by phone or via our website. Have a look at our Market Information section. Once you have obtained the current spread in respect of your market of choice, you may decide to do nothing at all or you may wish to back your opinion that the relevant market will either rise or fall in relation to the TM Fleming Spreads current quoted spread.

In summary :

IF you believe the market will RISE – you go LONG at the OFFER price - 10775

IF you believe the market will FALL – you go SHORT at the BID price - 10765

Note: It should be understood that you would not physically own the underlying equity, bond, currency, commodity etc. but you are simply betting on the price movement of the instrument in question

The SECOND STEP is to decide how much you want to stake per point movement of the market

That is the amount of €, £ or $ you wish to bet in relation to each point movement of the instrument.

This is called the stake, which can be as low as £1. The larger your stake, the larger the expected win or loss as when the transaction closes we would multiply the number of points up or down by the stake to calculate the total win or loss

To be covered against any adverse price move, TM Fleming Spreads always allocate a degree of risk to each individual market depending upon its perceived volatility and this factor is referred to as Initial Margin (IM). The initial margin is the minimum amount required in your account to carry any particular bet.

Maximum stakes can be calculated by dividing the available capital on your account by the applicable IM rate of the market in question. The maximum size of your stake will ultimately depend on your account status. You may of course choose a stake of a lesser amount if you prefer.

Once you have decided on your stake and have chosen to buy or sell, our systems will check that you have the ability to place such a bet and if this is the case, you will then receive confirmation that the bet has been accepted which will include the date of the bet’s expiry.

Each bet will have a specific date on which it will settle. However, you do not have to wait for the bet to expire in order to realise any profits or losses.

You may "settle", or close your trade at any time during our trading hours in relation to the relevant market simply by requesting a current quote and then betting in the opposite direction to the initial bet in the equivalent stake.

For instance, if your first (opening) bet were a sell bet, you would close this trade by giving an instruction to buy the equivalent stake at the current quote.

Once the bet is closed, any monies due to or from you will be immediately credited or debited to your account.

Trading stock indices with TM Fleming Spreads

Monday, 5 April, at 11.00

The June UK 100 Futures are trading on the underlying exchange at 4552.

TM Fleming Spreads is quoting the UK 100 Futures on a spread of 8 points

and quote you 4548 – 4556

You are of the opinion that the market is set to decline from current levels and therefore elect to

SELL £15 per point 4548

For every point that TM Fleming Spreads June UK 100 Futures offer price falls below 4548 you will be winning £15.

Conversely, for every point that TM Fleming Spreads June UK 100 offer price rises above 4548 you will be losing £15.

Monday, 12 April, 14.00

The June UK 100 Futures have fallen to a level where they are currently trading at 4500 on the official exchange.

TM Fleming Spreads is now quoting June UK 100 Futures at 4496 – 4504

At this point, you are of the opinion that the June UK 100 Futures will continue to decline and therefore decide not to realise your profits at this level.

Thursday 15 April 15.45

As a result of the publication of strong economic data, the June UK 100 Futures are now trading at 4524.

TM Fleming Spreads are now quoting June UK 100 Futures at 4520 – 4528

You had not foreseen this development and the data seriously undermines your initial views.

You therefore decide to close your original position and in order to do so you

BUY £15.00 per point at 4528,

You have just realised a profit of £ 300.00 calculated as follows:

Friday 18 June 16.30

The June UK 100 Futures officially expire at 4607.

Had you chosen to leave your original trade to run to expiry then you would have lost £ 885.00.

Note: The above principles apply to the opening and closing of bets for all markets offered by TM Fleming Spreads although it should be noted that not every market is measured in whole point movements.

The TM Fleming Spreads Market Information Sheets comprise a comprehensive list of those financial markets that TM Fleming Spreads currently quote and also specify the terms of each individual market, including their perceived volatilities (IM).

Betting on individual shares with TM Fleming Spreads

The following example compares a £50.00 Lloyds TSB June share futures spread bet with TM Fleming Spreads and actually buying 5000 Lloyds TSB shares through a UK stockbroker at a level of £4.30 a share.

Notes:

1. Our quote of 427-433 is based on there being 35 days to expiry of the relevant futures contract and is calculated as follows:
   Market mid price (430p) x LIBOR (5%) x days to expiry (35) / 365 days in the year + mid Price = 432.06
   Our Spread = (0.10% x 432.06) (4) + Market Spread (2) = 6
   Our spread applied to mid price (430) = 427–433
2. Price (433) x stake (50) x 10% = £2165
   
3. TM Fleming Spreads only permit customers to open positions with a cumulative IM requirement equivalent to 80% of the cleared funds deposited with our company, unless such positions are protected by guaranteed orders that restrict the entirety of potential losses to the amount of such funds

Notes:

4. We have assumed a £12.5 commission per trade, so the round trip would cost £25. Stockbrokers fees can be less than or greater than this figure due to, but not exclusively, the volume of business you provide them and whether you.
5. The UK stamp duty applicable is 0.5% of the proceeds of your selling order.
6. Capital Gains Tax assumed at 40%.

The extra profit generated by trading with TM Fleming Spreads is in this example as high as £ 573.55

Trading currency futures with TM Fleming Spreads

TM Fleming Spreads can provide you with a fast and efficient method of betting on the world’s currency futures markets with the added advantage of being able to trade these currency pairs in your own account currency thus avoiding any foreign exchange risk on your behalf.

Note:

• It is important to note that the two main worldwide currency exchanges, FINEX and IMM, quote markets differently in that the Chicago based IMM futures are quoted inversely whilst the Dublin and New York based FINEX futures are not.
  
  for example: IMM quote the US $ / Japanese Yen in U.S. $ terms:
  
  i.e. 0.009050 U.S.$ to one Japanese Yen.
  
  For ease this is simply quoted as 9050.
  
  FINEX however quote the US $ / Japanese Yen in Japanese Yen Terms
  
  i.e. 110.49 Japanese Yen to one U.S. $

Spread betting enables you to employ currency futures to either speculate on future exchange rate fluctuations or simply hedge against personal foreign exchange risk.

Note:

• When trading currency futures you should always ensure that you understand what constitutes a “tick”, and understand that currency futures
  can become volatile at the time of interest rate announcements and/or release of other key economic data.

Our Market Information Sheets, provide details of tick factors, spreads etc. but should you require any further clarification, please feel free to contact us by telephone on +44 (0) 20 7398 5258, or by email us at enquiries@tmflemingspreds.com.

Stop-loss facilities

When entering into any financial spread bet, you should consider the potential of incurring losses as well as your ability to cut and finance such losses.

The amount of your initial margin or credit allocation is not a limit to your potential losses and you may be called for variation margin unless you limit those losses by way of placing a guaranteed order at the time of opening your position.

We advise you to set a maximum amount that you are prepared to risk in relation to each position and be disciplined in respect of enforcing such levels .

TM Fleming Spreads allow you to put a stop-loss on any single trade, therefore specifying the level at which you want your transaction to automatically close, should the trade go against you.

Monday, 5 April, at 11.00

The June UK 100 Futures are trading on the underlying exchange at 4552.

TM Fleming Spreads are quoting the June UK 100 Futures on a spread of 8 points and quote you 4548 – 4556

You BUY at 4556 on TM Fleming Spreads offer.

However, you do not want to risk more than 100 times your stake.

You would therefore put a stop-loss at a level 100 points below your entry price, i.e. at 4456.

Thursday 15 April 15.45

The June UK 100 Futures have fallen to a level where they are currently trading at 4426 on the official exchange.

TM Fleming Spreads are now quoting June UK 100 Futures at 4422 – 4430

Should you not have used a stop-loss, the price at which you could close your position would be 4422. Therefore you would be losing 134 times your stake.

However, because you have used our stop-loss facility, a sell transaction automatically kicked in at 4456.

Therefore you saved 34 times your stake.

Note:

• It should be noted that no orders other than Guaranteed Orders are guaranteed either outside or during the trading hours of TM Fleming Spreads.

The above projection based on a non-guaranteed 4456 market order is not a 100% safeguard as the market can react to world events or negative financial data and simply open or gap through the price in question.

For example, terrorist attacks can cause all financial markets to drop dramatically from one level to another without any trading at the prices in between (commonly known as “gapping”).

In these circumstances non-guaranteed orders are filled at the first tradable price that TM Fleming Spreads is able to achieve in the underlying market.

Trading Currency with TM Fleming Spreads

Thursday 6th October 10.00am

TM Fleming Spreads are quoting a price for the December Sterling/Dollar (commonly known as December Cable) at 1.8004 to sell and 1.8010 to buy. You believe that the dollar is going to strengthen against the pound. You check the market information sheets for the Initial Margin factor for this market and decide to sell £5 a tick (equivalent to £500 per full cent move) at 1.8004. At the same time you place a guaranteed stop loss on the bet at a price of 1.8114. The extra charge for placing this guaranteed stop loss is three ticks multiplied by your stake, or the equivalent of £15.

Wednesday 12th October 9.35am

After some key data in the UK the December Cable quote has moved to a price of 1.7960 to sell and 1.7966 to buy. You feel comfortable with your position but decide to move your guaranteed stop loss down to a level of 1.8060. There is no charge for moving an order, guaranteed or non-guaranteed.

Friday 4th November 13.45pm

The non-farm payroll data from the US has surprised the market and the dollar has rallied strongly against the pound. TM Fleming Spreads are now quoting the December Cable at a price of 1.7894 to sell and 1.7900 to buy. You choose to lower your guaranteed stop loss to 1.8000 thus ensuring a profit from your bet no matter what Cable’s next move is.

Tuesday 9th November 8.20pm

Sterling is starting to recover and TM Fleming Spreads’ quote for December Cable has moved up to 1.7964 to sell and 1.7970 to buy. You decide to close your position, and do so by buying £5 a tick at 1.7970. You have now realised a 34 tick profit (you sold at 1.8004, and bought back at 1.7970) which equates to £170 (34 x £5).

Wednesday 10th November 7.00am

Sterling has continued to move higher overnight and TM Fleming Spreads first quote of the morning is 1.8040 to sell and 1.8046 to buy. Had you not closed out your position last night, your guaranteed stop would have been triggered at the opening and you would have closed your position at 1.8000, realising a 4 tick or £20 profit.

A non-guaranteed stop loss would have been triggered at the opening TM Fleming Spreads buying quote of 1.8046, which would have resulted in a loss on the trade of 42 ticks or £210. Trading with guaranteed stops is a very good way of safeguarding yourself against adverse overnight market movements.

Trading commodities with TM Fleming Spreads

TM Fleming Spreads quote prices for many of the world’s commodities. One of our more popular commodity markets is the Brent Crude Oil contract.

Friday 16th December 10.00am

Oil is in the news again and many of the world’s analysts are predicting a further rise in the price of a barrel of Crude Oil. After some research you agree with their view and decide that now would be a good time to buy the market. TM Fleming Spreads are quoting the January Brent market at a price of $65.10 to sell and $65.18 to buy. Your belief is that the price of a barrel of Brent will go higher than the $65.18 quoted and decide to buy for £10 per cent movement (equivalent to £1000 per dollar move).

Thursday 22nd December 3.00pm

After a rollercoaster ride, January Brent has fallen back to $64.00 and the TM Fleming Spreads quote is now $63.96 to sell and $64.04 to buy. You decide to close half of your open position and so sell for £5 a cent at $63.96. You have realised a loss on half of your original bet. Your loss on this part of the bet is 122 ticks (you bought at $65.18 and sold at $63.96) or £610 (122 x £5). The remaining £5 of the original bet is still open.

Friday 30th December 4.45pm

OPEC unexpectedly reduce the amount of oil that it supplies to the world’s markets. January Brent jumps over two and a half dollars and is now trading at a price of $66.50. The TM Fleming Spreads quote is now $66.46 to sell and $66.54 to buy. You quickly decide to close the remaining £5 of your original buy bet and sell at $66.46. You have realised a profit of 128 ticks (you originally bought at a price of $65.18 and sold at a price of $66.46) or £640 (128 x £5). Even though you made a loss of £610 on £5 of your bet, you have held your nerve and made a profit of £640 on the other £5. Your total profit for this trade is £30.

Guaranteed orders

On some of the markets that TM Fleming Spreads offer you have the ability to place controlled risk bets by way of guaranteed orders.

By utilising guaranteed orders, spread betting provides you with the potential to realise unlimited profits whilst having the comfort of a guaranteed cap on any potential losses.

Guaranteed orders are the only absolute protection against extreme market volatility which, when it occurs, can cause markets to open through or gap through non-guaranteed market order levels.

Roll-overs

TM Fleming Spreads also provides you with the facility to roll a bet prior to its expiry from one contract period to another at a preferential rate.

This is commonly referred to as a roll-over and avoids having to pay the full spread by closing your original trade and then opening a new position.

When rolling your position into a new contract period, TM Fleming Spreads will simply close your existing position at the mid price of its current quote, thus realising any profit or loss in respect of that position, and open a new position for you in respect of the next contract period at the current price applicable to that contract period as it reflects current fair value.

For example:

On November 15 th you bought £10 of the UK 100 Futures December (maturing on December 17 th) at 4100 and have seen the market rise to 4300.

You have the ability to realise a profit in the region of £2,000 but have a feeling that the market will continue to rise.

The maturity of the contract you bought is next week but you do not wish to close your original position to realise your profit and then open a new position as this would incur paying the spread for both trades.

You therefore roll-over the contract with our dealers from December to March (maturing on March 17 th).

The sale of the December contract is done using the usual spread, i.e. at 4298 if quoting 4298-4306.

The purchase of the March contract is done at the mid-point. You would pay 4302 on the March contract, even though it is quoting 4298-4306

By doing this, your new position remains open until March 17 th and you can reassess the situation.