A Guide to Financial Spread Betting
A Guide to Financial Spread Betting
Financial spread betting is a leveraged investment method. In simple terms, this means that traders can potentially achieve larger profits using a relatively small deposit. This also means, however, that your losses can exceed your initial deposit.
The deposit can represent only a small fraction of the total position held in the market. Investors are able to spread bet on a range of markets, including stock market indices such as the FTSE 100 or the Dow Jones, commodities such as gold and oil and forex rates such as USD/JPY and EUR/GBP.
Spread betting has existed for several decades, but has become increasingly popular in recent years as the internet has increased access to spread betting platforms.
Spread betting companies offer a range of trading platforms, which spread bettors can access. They are designed for any speculator, from the novice investor to the advanced trader, and are often commission free.
How Does Spread Betting Work?
Spread betting involves an investor speculating on the movement of a financial market. Spread betting investors do not own the underlying financial instruments which they are speculating on. This usually means that trading is quicker than standard stocks and share trading is and is often tax free*.
Spreads are constructed with a buy price and a sell price, representing the thresholds against which a position is initially placed. Traders speculate on whether the futures price will exceed the buy or the sell levels.
The key point about spread betting is that a profit can be made, from either a rising or falling market, ie what really matters is making the correct prediction on whether prices will rise or fall.
Venturing Into the Marketplace
If you are new to spread betting, you can learn a lot about the various trading platforms by using a demo account. Most spread betting companies offer demo platforms, where you can trade with virtual funds in order to get to know spread betting and the financial markets in general.
If you feel confident enough to move onto a live account, you may find it easier engaging in just one or two markets. A spread betting account usually gives you access to a range of markets and individual financial instruments on which to bet. By starting with just one, or a small number of markets, you can limit the risk of trading beyond your knowledge.
Close observation of particular assets and markets can teach you a lot about market behaviour. It can be helpful to observe how prices fluctuate over various time periods, ranging from one day to several days or even longer. Note that some markets will be more stable than others. And remember that as always, past price movements are not, in themselves, a precise guide to future performance.
Financial spread betting involves a high degree of risk to your funds and can result in losses that are greater than your stake. Ensure that spread betting matches your investment objectives as it might not be suitable for all types of investor. Always ensure that you only spread bet with money you can afford to lose. Before trading, ensure you are fully aware of the risk involved and if appropriate seek independent financial advice.
* In accordance with present UK tax law, this could differ/change based on your own situation.
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