The practice of spread betting started about 35 years ago and was used as a way to speculate on the financial markets. City professionals would place a spread bet on how much they thought the Stock Exchange would go up or down. But spread betting these days can be on anything you like. Sport is a particular favourite (football, rugby, cricket, tennis to name but a few) but politics is also prominent and you can even bet on television's Big Brother.

Basically it is similar to ordinary betting (fixed odds betting) but with an important difference. With ordinary betting, you're either absolutely right (your horse wins) and you win money depending on the odds quoted, or you're absolutely wrong (your horse doesn't win) and you lose the amount you have placed on the bet. With spread betting, the more right you are, the more you can win but the more wrong you are, the more you can lose – and your loss is not limited to the amount of your stake. Currently there's no tax to pay on any spread betting winnings (although this could change in the future).

Let's use a football match as an example. The various spread betting firms quote different spreads for different scenarios. These could be anything from the time the first goal is scored to the goal margin between the two teams, to the total number of corners taken during the game, to the number of players shown a yellow card etc.

Taking the first scenario as our example – the time the first goal is scored. The firm is offering a spread of 31–34 minutes. So if you think the first goal in the game will come after the 34th minute, you place an up bet or buy the spread at a fixed price per minute, let's say £10 per minute. If you're right and the first goal comes in the 59th minute, you win £250, ie the difference between the top end of the spread (34 minutes) and the actual minute the goal is scored (59 minutes) = 25 minutes.

59 (minutes) – 34 (minutes) = 25
25 x £10 = £250

But if the first goal is scored in the 10th minute, you lose £240. This is because the difference between the top end of the spread (34 minutes) and the actual minute the goal is scored (10 minutes) = 24 minutes.

34 (minutes) – 10 (minutes) = 24
24 x £10 = £240

By the same token, if you thought the first goal would be scored before the bottom level of the spread (eg before the 31st minute), you would place a down bet or sell the spread. So you'd win if the goal was scored in the 10th minute (£+210) or lose if the goal was scored in the 59th minute (£-280). The winnings can be good if you guess right, but the losses can be considerable if you guess wrong – far more than the amount you staked.

A firm may also quote a spread while the event is taking place. So, in the above football match, if no goal has been scored by the 20th minute, the firm may have changed its time of first goal spread from 31–34 minutes to 50–53 minutes. You may be able to close your bet in running (for example, if you had placed an up bet on the original spread at 34 minutes), which means that, unlike ordinary betting, you may not have to wait until the end of an event to take any winnings (or losses).

Different spread betting firms offer different services to reduce the risk of running up limitless losses. These may include putting a stop order on the bet which allows your bet to be closed if the spread moves through a specified level. Some firms offer a guarantee that you will lose no money beyond that specified amount. Otherwise a stop order won't stop you losing money, but it can put a limit on the amount you are prepared to lose.

Spread betting firms all have their own terms and conditions detailing the exact mechanics of their particular bets and you should ensure you read and fully understand these before you place any bets.

Remember to read the fine print, and if you're not happy with taking this kind of risk, don't bet!