Introduction to spread betting
Spread betting is a form of derivatives product that enables the trader to trade based on the price movements of financial products such as shares, currencies, indices, commodities among others. Spread betting can be used to check the changes in prices regardless of whether they are rising or falling. If a trader goes long/ buys his/ her profits will rise according to that price increase. Similarly, if a trader goes short/sells, his/her profits will rise when the prices fall. It is important to note that if a trader goes long and the stock prices fall, then he/ she will definitely incur losses. Given that spread betting is a leveraged product, a trader is required to make a small deposit of the full value of the position taken. This means that the profits or losses expected from the initial capital is higher than in other forms of trading. Usually, the margin required ranges between 1 percent and 10 percent of the total value of the trader’s position, depending on the market dynamics.
Benefits of spread betting
Trading can be done on rising and falling markets. This makes spread betting more preferred to traditional trading markets since profits can be made whether the prices go up or down.
It’s tax free. The UK Capital Gains tax is not applied on profits made from spread betting since it is a derivatives product and thus classified in the same class as gambling.
It’s a 24 hour market. It is so important to be able to trade at any time from any place. This is because market prices move so quickly which makes 24 hours 7 days a week a perfect trading opportunity.
Trades are executed instantly. The trader picks the market, the bet size and then confirms it. This is followed by an instant execution which takes at least 0.1 seconds.
It’s a leveraged product with small margins. A trader does not have to trade in the full value of his/her position but rather a small percent. This gives the trader a chance to increase their investment capital.
There are a huge range of markets. Spread betting offers a trader an opportunity to trade in thousands of individual currencies, shares, indices, commodities, interest rates, options among others. CMC Markets for example has more than 7000 products available for spread betting in more than 30 different markets.
How spread betting works
When a spread betting position in a market is open, the trader has two options, to buy or sell on the underlying market price. If a trader predicts that the prices will rise, he/she buys and sells when he/she predicts the prices will fall. A profit is made when the market moves in the trader’s favor and a loss happens when the market moves against.
Most companies who offer these financial products have resources and tools to help their clients identify the best products. These include free essential tools, market data, economic calendar, ProRealTime charting, market screener, signal centre among others. The trader opens a position upon identifying a suitable market. The trader should have in mind the buying and selling prices. The difference between these prices is known as the spread. The buying price is always higher than the underlying asset value while the selling price is lower. The trader should also identify a market with a suitable bet size and expiry date. To avoid incurring losses, a trader should put a stop close once the market gets to a certain level. The stop is set when the bet is opened or standard stop is attached to an open position.
Finally, the trader monitors and closes their position. All the bets made can be viewed against the profits/loss that these positions can make. If it gets to the trader’s preferred position the trader can close the bet.
Risks involved in spread betting and how to manage them
Spread betting has more risks involved than the conventional trading methods since it is a leveraged product. The exponentiation of the profits made means that the losses which can be incurred are also huge. Sometimes the losses may exceed what was initially traded.
Companies offer a range of techniques to manage the risks and approach the market sensibly. The most common techniques include stop loss orders, guaranteed stop loss orders and trailing stops.