FOR MANY YEARS trading financial markets in general and spread betting in particular, was felt to be just the reserve of City professionals. But with advances in technology over the last decade or so, and an increased awareness of the impact the gyrations of financial markets have on our everyday lives, it has resulted in a move more and more into the mainstream with every year that passes.
Even among people who have never tried it, there does seem to be a lot of curiosity about financial spread betting, resulting in a wide spread (excuse the pun) of opinion at both extremes – with some thinking it is an easy way to make money, and others petrified at the risk a small movement in a market can have on your profit or loss.
While of course spread betting is not suitable for everybody, it does not necessarily have to be such a rollercoaster ride of emotions, glued to the screen 24 hours a day worried about how the latest Chinese trade figures will impact on your long FTSE/short pork bellies trades. There are plenty of tools these days that are available – and should be used – to help manage risk and free your time up to do something more productive than watching numbers change. For example, stop losses have been around for a long time – and with the advent of guaranteed stop losses you can absolutely nail down your maximum risk right from the start of the trade, regardless of what effect outside events may have on your position.
Another important consideration is thinking about the size of your trade. If you find yourself swinging from elation to depression with every one penny move in the price of Marks & Spencer and the effect it is having on your account balance, then it could be the trading gods’ way of telling you that maybe you should scale back the size of the position. Figuring out the direction a market is likely to take can be tricky enough at the best of times without the additional stress of trading too big.
Trading at a level that makes sense based on your risk capital can help you look at the markets from a balanced viewpoint, and not get caught up in the minute-by-minute swings.
Do you really know what is spread betting? Financial Spread Betting is basically placing wagers on virtual or stocks which are related to the real live stocks.
The difference with stock trading to spread betting is the ownership factor, whereas in Financial Spread Betting unlike stock trading the player never really owns the stock but rather just bet on it.
The best thing about what is Spread Betting is the fact that one can bet on just about anything such as stock, currencies, oil price, gold price and so on. The Spread Betting much like on sports betting is either under or over bet in which the value or the units can either go up or down.
Shares can be expected to rise in value so they can be sold in profit which is called “going long”.
Shares can also be expected to fall in value so selling them will be minimizing the loss, this is called “going short”.
The Spread by definition is basically the difference between the buying price and the selling price as quoted by the Spread Betting Company.
The main advantage of spread betting is the fact that they are tax free and run within time limit which means that the players can choose whether to close the bet early if this proves financial for him. The player can also close the bet to minimize losses if the bet gone against him.
Another advantage is the “stop loss” option which enables the players to stop the bet when the bet has gone against him, meaning he will lose up to a certain amount the player limit himself to and not more than that.
Unlike trading real shares, in Spread Betting the player only provides a deposit which is a margin bet or a proof of funds and not the entire amount of the share.
Unlike regular sports betting, the bet can end before the end date if the player chooses to do so, either from positive or negative reasons. This means that when betting on spreads you don’t have to wait to the due date of the bet.
An example to what is spread betting can be a bet on the shares of a company. Let’s say the spread betting company quoted a spread of 530. The sell price is 520 and the buy price is 520 (520-530). If the player chooses to bet £50 per point for the share price to go up and indeed the share price goes up by 555 when the player decides to close the bet, the player would make – 25 points in profit times £50 = £1250 !!
It can go the other way around as well of course so one should be careful when placing a bet on financial spreads.
To start spread betting the financial markets, it is worth repeating the basics of the stock market -:
- We should expect that a stock price will either rise or fall in value.
- A stock is bought on the expectation that it will rise in value so that it can later be sold at a profit. This is referred to as ‘going long’
- When a stock price is falling or it is expected to fall in price, the shareholding is cut to minimise losses.
How to Spread Bet: Starting Out
If you want to learn how to spread bet it is best to get a practice account with a spread betting provider. Most brokers will allow you to open a demo account, either for an indefinite period or for a set amount of time, just to try out their trading platform and your strategies to see if you want to trade with real money.
Even if you have practiced without using money, you should be careful when you start trading live as this is still a very different and emotional experience. Until you have put your own cash on the line you may not understand how many traders find it difficult to stick with their strategies in the real world.
Right from the start you must understand that financial spread betting is best approached as a business, rather than as gambling. It is called betting, but the overall effect is the same as financial short term trading, rather than betting on a horse race. Many people have a flutter on the Grand National without giving it too much thought, mainly because their losses are limited to the stake; spread betting differs greatly, as your losses can multiply rapidly to become much more than your trading account.
One of the ways to restrict your losses is to apply stop loss orders to every trade you make. This is generally considered a good practice in most forms of trading, and certainly when trading derivatives such as spread betting, where the leverage can eat up your funds almost before you know it. Another form of order that you can place with many brokers is called the guaranteed stop loss order, and this overcomes the problem with the stop loss order that it becomes a market order when triggered. The guaranteed stop loss will take you out of the trade at a definite price, regardless of whether the market is plummeting.
You have to pay for a guaranteed stop loss order at the time you place your spread bet, and this is usually paid by your broker quoting a larger spread, increasing his profit to cover the guarantee.
When you first practice how to spread bet you’ll notice that for every bet you place you are immediately in a losing position. In other words, if you wanted to close your bet the moment after you opened it you would lose money, because of the spread. This is the cost of doing business, as the spread is the means of income for your spread betting provider.
Finally, you should always be aware of how much you can lose, and make sure that you do not over trade. Risk only as much as you can afford, taking into account the leveraged nature of the spread bet, and when you get more confidence and expertise you can increase the size of your bets. If you overstretch yourself and take a big loss to your account, the broker may make a margin call which means you must deposit more money to cover the cost.
Up to now, we’ve looked at the process of spread betting, and drawn parallels with trading. The similarities make regular trading and trading spread betting resemble each other, and sometimes people are confused as to which to use, and which is better. On balance, it seems that spread betting has several advantages over regular trading, and we look at them here.
You can spread bet on many different financial instruments, so some of the comments will be more applicable than others. The first advantage of spread betting is that you only need one trading platform regardless of the market that you want to trade. This saves you having an account with a stockbroker, a futures account and perhaps a Forex currency account. You can profit from each of these markets using one spread betting broker and one trading platform, with which you can get totally familiar, which avoids you making mistakes when placing orders.
The second major point about spread betting is that your trading is leveraged, which means you get greater “bang for the buck”. This is available on some other financial instruments, such as futures or Forex, but the best you can get with stock trading is usually a 50% margin, which means you have to put up half of the value of the stocks in order to trade them. Spread betting represents a highly efficient way of using the money you have because of the gearing enjoyed.
It is true that the gearing also opens you to larger losses. If you are trading stocks and the stock goes to zero, then you have just lost the money from your account. If you’re spread betting and not watching your losses, you may lose much more than you have in your account. As with other financial derivative products, you must learn to accept this as part of the opportunity that leveraged products give for profit.
If you are trading stocks, you have to pay stamp duty on your transactions. Whatever other markets you are trading in, you will usually have to pay either income tax or capital gains tax on your profits. Unless trading is your job, your profits are not usually regarded as income. It’s much more likely that you will be subject to capital gains tax instead. Apart from having to pay the tax, if you trade frequently you will need to have available substantial records for the Inland Revenue to prove your gains and also, importantly, your losses to offset against the gains.
This is where spread betting trumps the other methods of trading in the financial markets. As spread betting is regarded as gambling, all your profits are counted as winnings. For the UK resident, this means that capital gains tax does not apply, and you’re free to keep all your profits.