Trading Spread Betting – What’s that all about?
Spread betting offers a simple and effective method of backing your own judgement and betting on movements in financial markets. So it shouldn’t be a surprise that spread betting trading is becoming increasingly popular. Where there is volatility in the markets, there are opportunities to exploit. And these products provide you with the tools to make the most of those opportunities. Spread betting permits traders and investors to take a position on the future direction of a financial market without having to buy the asset itself
Spreadbets are essentially simple form of derivatives that allow you to gain advantage of the movements of thousands of different markets including shares, indices and currencies. You can even sell short to profit from price declines. With the ability to go long or short in rising and falling markets and the capability of magnifying profits, or losses, spread bets are in effect a useful addition to an experienced investor’s armoury. However trading spread betting is also a high risk activity involving what is in itself a simple concept, and whilst it can focus on sports, or politics or other events, the most popular form of spread betting is on the financial markets. Whether that is a single company share price or a whole index such as the FTSE 100, if a trader thinks the price is too low and set to rise, they buy, or if they think it is set to fall then they sell.
Firms offer two prices, the buy price and the sell price. If the trader is betting on the price going up they use the buy price, if they think it will fall they use the bottom of the quote, the sell price. The difference between these two prices is known as the spread. As opposed to traditional financial routes where profits come largely from rising prices, financial spread betting allows you to benefit when a stock, commodity or index is falling as you can bet that it will go lower in price.
Traders set a price per penny movement. If, for example, Tesco’s share price started at 358p than the spread could be 351p-352p, as in spread betting the provider doesn’t have to wrap the spread around the actual price. If the trader thought it was going to go up, they might buy at 352p at £100 per penny. If Tesco ended the day at 360p, that eight point increase means an £800 win. However, if Tesco were to end the day two points down, the trader would be left having to pay £200.
The position an investor takes is actually a bet and they never own the instrument they are buying or selling. This makes it flexible, as investors can bet on a share falling as well as rising. It also can make it tax-efficient as it is not subject to capital gains tax or stamp duty (although tax laws are always liable to change and investors should check current tax laws before trading on this basis). This allows traders to use spread betting as a hedging strategy against shares they already own, and also enables trading no matter what the market conditions.
A number of spread betting firms offer the opportunity to bet using leverage. Leverage essentially allows a trader to make a larger bet with a smaller initial amount of capital. i.e. in other words spread bets allow a large investment to be controlled from a small deposit. In this sense spread betting is a derivative, in that the value of a contract is based on the underlying value of another security. Firms set a margin requirement, which is a cash amount which needs to be in the trader’s account to be used as collateral against the leverage. Gains can be amplified in this way, allowing for returns which otherwise would be out of the trader’s reach. In the same way, losses can be equally amplified, and can lead to the loss of more than the amount originally invested. Spreadbetting is not suitable for all investors, and only ‘risk capital’ or money the investor can afford to lose, should be used for betting.
Potential gains are obvously higher than a traditional broking account because of the leverage effect. A trade in a liquid equity or index market might only require 5% of the effect exposure. Spread betting can hence be a flexible and exciting way to trade the financial markets, but proper risk management is crucial. These are high risk products since the utilisation of margin means that you are effectively borrowing money from your spread betting provider and you can end up losing more than your initial investment. However, there are a number of ways to manage or reduce this risk. Irrespective of whether you go long or short, you deposit anything from from 1% of the deal, in the case of liquid indices, to 30% or more for less liquid stocks, which is your margin deposit. Margin is calculated on a daily basis for the most popular stocks, and you pay financing interest on the size of the deal. The unencumbered funds you have left in your account, your free equity, is adjusted by your overall profit or loss. Keep in mind also that betting firms want to set price spreads in such a way so they have equal amounts of buyers as sellers, offsetting risk for themselves. This means for every winner there is a loser and with leverage, the stakes can be high.
Our home learning course provides you with a vast array of possible applications, in terms of possible markets you can trade. You can use spread betting to trade any liquid market; from all the financial indices e.g. FTSE 100, Dow (Wall Street), NASDAQ, DAX to all the major currencies such as US Dollar, British Pound, Japanese Yen and the Euro. They can also be used on all commodities such as Gold, Silver, Oil, Wheat, Sugar, and Lumber etc. In addition, you can also use it to trade shares.
Those who are just starting out may find it useful to work through an educational guide. Our spread betting course will teach you the successful City Traders’ techniques which enable you to predict market moves of the whole range of markets that exit and trade virtually any market that you want. These techniques exploit the markets as they go up and down, thereby maximizing your profits. This is how the biggest profits are made.
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As you probably found out already, spread betting is here and it’s big.
Spread Betting is the art of trading virtual stocks of products which are also traded in the real life and its value is compared to their real life value. However the different is in actually owning a share of the product as it is in real life.
For example: buying 10 shares of Google in a price of $2500 or something (depends of the share value of course).
In spread betting you simple place a bet on the spread of the share or value of the product in the attempt to determine whether it’s bound to go up (long) or down (short) . In any case you can win or lose just like in real stock trading.
Trading Spread Betting is intended to supply information about trading spread betting and to help all of you who didn’t yet discover the greatness of spread betting and the fact that it’s tax free and it’s more simple than Forex or any other investment you can do online.
Tune in and read further as we get you into the spread betting world. The great world in which you can turn your spare change into a lot of money with little or no effort.