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Spread Betting

Spread betting involves taking a position based on whether you think the price of an asset will go up or down. The size of your profit or loss will be determined by the stake you place and how far the price subsequently moves away from your entry price.Fixed Odds betting is when you take a position on whether or not a certain event will occur.With fixed odds betting the potential profit or loss is set by the odds that the bookmakeroffers, and you enter into a binary win or lose scenario. If your desired outcome does not materialize you lose the stake you placed. Spread betting involves having a variable range of profit or loss, and your winnings or losses can be numerous multiples of the original stake size.If you think Real Madrid will win their next match by a score line of 3-1 and you place a £1 stake atfixed odds of 10/1 from a bookmaker; should the result be as you predicted, you will receive £11. That is made up of the original stake £1 and the £10 winnings. If any other score occurs, you lose your £1 stake.You could place a spread bet on the same match. Again using a £1 stake you Buy goals after being offered a bid/offer price by a broker of 1.5-2.5 goals. Should the scoreline be 3-1 and the total goals number 4 then you’d win £1.50. Calculated as 1.5 points difference between what you bought and what materialized, multiplied by your stake of £1.The Live Pricing that is associated with Spread Betting introduces a dynamic element. Should all of the goals have been scored in the first ten minutes of the match then the broker offering the spread, anticipating more goals to be scored at some point during the match would increase the bid/offer; for sake of argument let’s say the price offered moves to 5.5-6.5. At that point, with 80 minutes of the match to play you could close out the ‘Buy Goals’ position by selling at 5.5.  Difference between entry and exit price would be 5.5-2.5 = 3. Multiplied by your stake of £1 you would have realizedwinnings of £3 only ten minutes into the game.Stepping right back to your initial position of Buy goals at 2.5.  If the game had ended goalless then you would have lost 2.5-0 x £1 = £2.5Whilst fixed-odds betting is more passive in nature the fact that the event is clearly defined allows you to bet on a sequence of events occurring. Multiple bet options such as Accumulators offer odds on two or more events occurring and pay out only if all you correctly predict the outcome of all of the events.
Spread betting involves taking a position based on whether you think the price of something will go up or down. The size of the stake you place will reflect the strength of your opinion and whether you make a profit or loss from the trade will be a function of the subsequent price action.For example, if you buy a position in an equity instrument which then goes up in price by 15 points, your profit would be 15 times your initial stake. If you had bet £2 per point, you’d make a £30 profit. If you called the trade wrong and the price falls, you’ll lose a multiple of your stake for each point the market moves against you. Spread betting allows you to sell as well as buy according to your view of the situation; which is something that can’t be done in traditional ‘buy and hold’ investing.There are a wide range of markets to trade using Spread Betting. Financial market spread betting covers instruments ranging from: forex, equities and Indices through to bonds, options and futures. It’s also possible to trade more esoteric markets such as sports, political events and house price indices.As a concept,Spread Betting is fairly straightforward, but don’t let this blind you to the very real risks associated with it. Being a leveraged product it is possible to suffer substantial losses, and research, preparation and analysis are key factors in determining whether you make a profit or wipe out your account. Trading in small positions or a Demo account will introduce you to the nuances of the process. While there aren’t commissions as such associated with trading Spread Bet markets, putting a position on in an instrument with a wide bid/offer spread and immediately finding your position considerably under water provides an important lesson.Spread betting is a form of taking a position on an instrument without actually ever owning it. You are trading a derivative of an underlying ‘asset’.An interesting and important consequence of this is that you don’t actually provide the total amount of capital that would be needed to buy the asset outright. Instead you place margin with a broker platform and the broker holds this as a guarantee that you will be able to pay for any losses that occur from your trading. It’s therefore possible to use the leverage provided by the platform to trade larger positions and expose yourself to risk and returns that are considerably greater than when carrying out buy and hold investing.Prior to putting on any positions you’d do well to use the widely available and free research and analysis tools that trading platforms offer. Other trading tools include Stop Losses that are a designed to limit your potential losses. Widely held opinion is that these are vitally important to help prevent you losing all your capital but the pros and cons of using them need to be understood.The extent to which Spread Betting is right for you will ultimately come down to personal preference. The use of leverage does mean potential losses are multiplied. On the other hand some instruments allow traders to trade in small sizes and they can also trade infrequently without incurring fixed fees just for holding an account.
A major factor to consider when Spread Betting is that you can lose much more than your initial stake.Spread betting itself is relatively intuitive and is, in the simplest terms, a way for you to express your opinion as to whether something is under or overvalued. As the outcome of the event is not known at the time of placing your stake, the main way to manage your potential downside is through stake size.Because leverage is used, when you make a small initial capital outlay you have exposure to a much larger position. This means that profits on winning bets will be multiplied should the market move in your favor, and your losses will increase in exactly the same way should you make the incorrect call on market direction.The benefit of using small stakes is you remove the risk of heavy losses or even wiping out your account completely. Another advantage is that it allows you to manage positions according to your pre-planned strategies rather than fear or greed being your major drivers. Trading in small sizes will limit your upside as well as your downside, however, that raises the question ofwhat strategy are you using, that is, do you have a plan?Markets can move quickly and unexpectedly. When this volatility is impacting your positions then things can get really scary.When putting on a position you’d do well to use the widely available research and analysis tools that trading platforms offer for no charge. Taking Bollinger Bands as an example, you can use those to give an indication of what price action might look like if market volatility picks up. Unexpected news announcements are by their nature hard to predict, but those that might impact the market follow set timetables and details of announcement times are given in economic calendars available to all.Announcements regarding US employment and interest rate announcements happen at set times, so someone adopting an aggressive risk-return policy might regardsuch moments of increased volatility as trading opportunities. It would be a high-risk strategy and it might be worth remembering a lot of institutional investors follow this calendar to ensure they are ‘out of the market’ to preserve capital to make money on days when it’s easier to read the markets.No-one wins all the time and losses will happen but if you’re looking to make money out of spread betting then you need to fully understand it. Consider, are you putting on too many positions and just churning through ideas rather than following a plan?Have the market conditions changed to make your strategy redundant?If you don’t even know why you are on a losing streak it’s time to take the heat out of the situation, scale down and re-evaluate.Stop losses can be used to mitigate your risks. The trading tool involves you inputting an instruction to automatically close out a position should a certain price level be triggered. They can also be used to trail a winning position and therefore protect profits. Your strategy should factor in the benefits of the different kind of stop losses that are available and in particular consider Gapping risk.A more moderate approach to spread betting involves using a Demo account, putting on smaller stakes or devoting more time to research and analysis. The only way to take risk down to zero is to stop spread betting and take positions off. If that frees up time to try out new broker platforms or different strategies, then you could not only be avoiding market losses but improving your chances of making profits in the future.