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.