Spread Betting Explained
Many people are put off joining a spread betting firm as they are under the illusion that it is either too complicated or to risky. It is true that there is more of a learning curve than traditional share trading but once you get started it is all very straightforward and it is possible to make some good money from your spread betting endeavours.
It should always be remembered that there is no rush to start trading. The markets will still be there tomorrow, next month or next year so only start trading when you are sure you know how the whole thing works. It is advisable to start paper trading or use the demo accounts that some spread betting companies offer but if you really want to get started on a sound footing I would advise starting with the Finspreads Academy which will allow you to trade for as little as 10p per point as well as taking advantage of some of the best Spread Betting training that is available.
If you think that a share, indices or commodity will fall in price you sell and if you think that it will rise you buy. The difference between these two prices is the spread. If you wanted to buy shares with a normal stockbroker you would have to pay a dealing fee as well as paying out for the full price for all of the shares. With Spread Betting, there is no dealing fee payable as they simply make their profit from the spread.
It is very tempting to place higher stakes when you start calculating how much money you can make from Spread Betting but you should always remember that you can just as easily lose this amount if you don’t know what you are doing. It can be shocking how fast the markets can move which is brilliant if is moving in your favour but if it moves against you it can be quite a shock to say the least. Always be aware of the downside and use the stop loss facility if the firm that you are using offers one.
An Example Trade
Lets say for example that you are of the opinion that British Airways is due a change of fortune and there is a likelihood that their price will rise. You log onto your spread betting account and you will see that British Airways is priced up at 237.1 – 237.7. You decide to place a bet of £1 to buy at 237.7. To close a buy trade you have to place a sell trade so you can see from the example that the sell price will have to rise from 237.1 to over 237.7 for you to make a profit.
The Benefits of Spread Betting
What is it about spread betting that makes it worthwile? Is spread betting for me?
The first and most simple advantage that spread betting provides is the money making chance it brings.
It is levereged and should you make the right choices you will simply be in the money.
Here are some of the other advantages of spread betting:
- You can trade the market long or short
Profiting from falling markets is not reserved to institutional fund managers or hedge funds anymore. Individuals who have an account with a provider can now also benefit from the possibility to short financial instruments, therefore maximising profits in volatile markets.
- No commissions
Most reputable financial spread betting firms offer an all-inclusive, no bad surprises, no extra costs service.
- No stamp duty on UK spread betting
Spread betting is a trading technique whereby you get exposure to a financial instrument without physically owning it. This means that you do not even have to pay stamp duty on your transactions. This represents a substantial saving compared to dealing with a regular stockbroker.
- No tax or CGT
The profits you make are free from UK capital gains and income tax. (Tax Laws are subject to change).
- No currency risk
Once you have elected your reference currency – EUR, $, £ – you have the facility to process all your transactions in that reference currency, without running any currency risk. This is because, as opposed to standard share dealing, most providers quote prices per point move, not per EUR, $ or £ amount.
- Instant execution – with most spread betting providers
You do not have to wait for your broker to get back to you before entering or closing any trade. Whenever you feel like spread betting, most providers offer instant execution by the telephone or via an interactive online dealing system, assuming appropriate liquidity in the markets.
- Bet small or large – you have control of your risk profile!
Good spread betting providers allows you to trade from as little as £1 (or currency equivalent) per point on all the markets – far smaller than you would be able to trade with a broker on the underlying markets.
- Hedging facilities
If you know of a foreign currency payment to be made in the near future and are happy with the current exchange rate, a good spread betting house can help you hedge against any adverse currency movement.
They quote the main currency cross rates and are happy to consider any specific request. This equally applies to hedging a portfolio of stocks for a limited period of time, or arbitraging between particular stocks.
Many newcomers to spread betting find the whole concept quite confusing but rest assured that after a short period of time it becomes second nature.