When placing a spread bet, your wager is per point or per pip. Rather than betting a fixed sum on whether a market will move up or down, the total profit or loss of a spread bet is determined by the amount the market moves in either direction.
Points and pips determine both the amount you’re able to profit and the amount you can lose.
To illustrate this point, let’s consider a spread bet placed on a market at £100. If you were to wager £5 per point and place a stop loss 100 points from the starting value, your wager is not £5, but rather £500.
While this concept is pretty straightforward, it’s important not to confuse points and pips. Depending on which type of spread bet you make – £X per point or £X per pip – the result will be significantly different.
A point is 1p. An example of a spread bet that uses points as the measurement for profit and loss follows.
Let’s say there’s a share valued at £50.20. If you bet £5 per point that the share will increase in value, and the share moves to £50.55, your profit will be £175. If, on the other hand, the shared dropped to £50.00, the loss would be £100.
Pips are fractions of points. There are 100 pips in a single point. Here’s an example of a spread bet that uses pips as the determiner of profit and loss.
There’s a currency valued at £5.05, but it uses pips for spread betting, so it’s listed at £5.0505. This makes the currency five pounds, five pence and five pips. If you place a spread bet at £3 per pip, and the currency increased to £5.0515, your profit would be £30. If the currency increased to £5.0600, the profit would be £285.
When pips are used, even a fraction of a movement can generate a sizable profit or loss. Consequently, it’s best to take precautions when placing this type of spread bet.
Different markets will display to a different number of decimal places. In most cases, this will implicitly indicate the value of a point, since you cannot value a fraction of a value that isn’t visible.
For instance, if you read a market on a trading platform as £37.98, you can intuit that your bet is per point. You know this because the market displays just two decimals. If a different market were to show the value £54.7191, it indicates that a pip goes to the fourth decimal.
Otherwise, the exact wager should be made explicit by the spread betting broker’s trading platform.
In addition to the point or pip movement, the spread involved with the bet will influence profit or loss. The spread is the gap the market has to cover before a profit is made. For example, if the spread is set at five pips, and you wager on a market valued at £1.0000, the market would need to pass £1.0005 before you profit. If your wager was £3 per pip, you would make £3 once the market hit £1.0006.