I must admit when I first stumbled across Betfair and the concept of sports trading I was immediately both enormously excited and totally confused. Like most people I'd had the odd bet, usually a losing one! I would put a tenner on Chelsea to beat Manchester United and take whatever odds the bookie happened to be offering. I would invest 50p on a totally useless 7 game accumulator which would pay out a couple of grand....
The traditional way of betting has been to BACK something to happen: you might put £10 on 'Mr Can't Sing a Note' to win X Factor at 100/1. If said crooner wins X Factor you get £1010 back - (£10 x 100 plus your £10 stake). If he contrives to get voted out at the first attempt your ten pounds is history - swelling the bookies profits.
What Betfair (and other betting exchanges) offer is the chance to take the opposite view. I'm no Simon Cowell, but I reckon I'd be able to tell this man can't sing so would be happy to bet that view. I LAY Mr I Can't Sing a Note' at odds of 100/1. In the above example I take your £10 stake and offer to pay the £1000 due to you should the unthinkable happen. He wins, I stump up £1000 - he loses - I keep your £10.
I can't actually abide X Factor or any other 'reality TV' for that matter - so let's put the above example into a footballing context. Below is a screen shot featuring one of the Euro 2012 Qualifying matches between Austria and Belgium.
You will see that the traditional Betfair screen shows both the odds available to BACK (B) and LAY(C) both teams and the draw.
If you think Austria will win the match you BACK them for £100. If they win you will see £100 * 2.54 = £254 in your account after the match, comprising your £100 stake and your winnings (£100 * (2.54 -1))=£154. Actually it will be slightly less, as Betfair will charge you a 5% commission on your winnings - they've got to make money, after all! If Belgium win, or the game is drawn your account will be £100 light the next time you look at it!
If you think Austria will NOT win you might chose to LAY them for £100. If you do this, and Austria DO win the game you will pay to the winner (£100 * (2.54-1))=£154 - which is exactly the same sum as you would have won in the example above! If Belgium win, or the game is drawn your account will be £95 to the good - i.e. you keep the backer's stake of £100 minus Betfair's 5% commission!
To those new to the betting exchanges the odds figures might seem strange - after all for ages traditional bookmakers have quoted odds as fractions. So, back at 2/1 with £100 you return (2 * £100) - the profit, and £100 - the stake. 2/1 in decimal odds is actually 3.0 - so subtract 1 from that and you are left with 2 which mirrors the previous calculation. When assessing your position in a Betfair market if you want to know your RETURN from a BACK bet, simply multiply the stake by the odds. If you wish to know the PROFIT from the same bet, subtract 1 from the stated odds and multiply that by your stake. If you wish to know your LIABILITY on a LAY bet, do the same sum - if you have staked £100 at 2/1 (decimal 3) your liability is £100 * 2 or £200!
All odds in whatever market represent the approximate chance that selection has of winning the bet. To put that into English, Austria are quoted above at odds of 2.54. This means that Austria has an implied probability of winning 1/2.54 percent of the time- or 39.37%. So if the match were played 100 times Austria SHOULD win 39.37 times!
Belgium are quoted at 3.05 - an implied percentage of 1/3.05 or 32.79%. The draw is quoted at 3.5 - an implied percentage of 1/3.5 or 28.57%.
Now, add those implied percentages together and we get an interesting figure: 39.37 + 32.79 + 28.57 = 100.73. This means that at the odds above, there is a 100.7% chance of one of those outcomes happening! Obviously that is impossible - barring an abandonment ONE of those outcomes is 100% going to happen! This is how the bookmaker makes his profit - that figure is called the OVERROUND and in this case there is a 0.7% margin built into the market - show as 100.07 at position A on the screenshot.
Below is a screenshot of the same market offered by a traditional bookmaker of the same game:
If we do the same sums here we see Austria have an implied percentage chance of 1/2.4 = 41.67%, Belgium of 1/2.9 = 34.48% and the draw of 1/2.9 = 30.77. Add those together and you see a figure of 106.92% - so the bookmaker's margin on the market is nearly 7%!
The overround takes potential profit from winning bets and the very small overround on Betfair markets is one of its big attractions - you can generally get much better odds - although you obviously need to bear in mind the 5% commission paid on your winnings!
What we are talking about above is, really, gambling. And gambling is not what this blog is all about. To succeed in consistently making money on the betting exchanges we need to get our heads around TRADING.