Financial Spread Betting Baby!

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You have reached a new spreadbetting guide aimed to help educate retail investors and trading thinking about trading in spreadbetting.

Increasingly, we are seeing more and more people who want to generate an income by spreadbetting on the stock market, either as a new career or as a lucrative hobby.

Traditionally, for most investors in stocks and shares, a financial crisis, like that which has been plaguing the eurozone for most of 2010, is something to be feared. What will happen to your stocks or unit trust investments when even whole economies, like those of Greece, Ireland and Spain are reeling under the burden of a debt crisis that has still to play itself out? It all seems quite frightening, but all this market volatility provides ample opportunities for canny traders, especially those with financial spread betting accounts.

Spread betting offers traders the opportunity to speculate on a whole range of markets including indices, currency pairs, commodities and individual shares. Spreadbetting is a highly flexible alternative to traditional stock trading by allowing traders to profit from both rising and falling markets. What’s more all gains are tax free which is particularly enticing in the current economic climate when tax increases seem to be the order of the day.

Workings of Spread Betting

Spread betting is all about working out for instance where a share market stock or index will finish the day compared with where it opened. It is not limited to stocks and indices either; you can spreadbet on shifts in the prices of cattle, cocoa, hogs, oil, gold, oats, soya beans, lumber and heating oil…etc.

It is important that you understand the key features of spreadbetting before you decide whether or not to risk your money. Spreadbetting is traded on margin which in practice means that you do not have to pay the full market price of the underlying shares. You only have to put sufficient funds in your trading account to cover the margin to open the position. Therefore, you might only need to deposit £1,000 as initial margin to enter into spread trading positions up to a value, of say, £10,000. If your speculative investment rises to £12,000 – which amounts to a 20% rise in the value of your position – you will in fact stand to make a 200% return on your investment, as you only deposited £1,000 initially.

Spread Betting: The Individual Investor’s Most Powerful Profit-Making Tool

Tax efficient ways to make money…

Spread trading is a capital efficient investment product that allows you to speculate on the stock markets. You can also utilise spreadbetting to diversify or hedge your portfolio, because spread bets require only a margin deposit to open a trade as opposed to the full cost of the underlying market exposure. You can release capital tied up in shares positions or open new positions that are long or short.

Go Long or Short

An important feature of spreadbetting is that you can enter both ‘long’ or ‘short’ trades. A “long” position involves purchasing the contracts and selling them again at a later stage, hopefully after the price has risen. So in essence, ‘long’ positions make money in a rising market.

A ‘short’ trade is the opposite – selling contracts first and buying them back later. This may sound strange but in practice you can make money in the markets by either ‘buying low and selling higher’ or by ‘selling high and buying lower’. If you manage to buy them back at a lower price, you will make money. Therefore ‘short’ trades make money in a falling market.

Spreadbets are very powerful trading tools that will benefit active traders and investors who are looking to optimise their cash flow and benefit disproportionately from small market movements. Equally, spreadbetting can also be utilised as a cost-effective hedging mechanism that allows you to exploit market movement whilst benefiting from corporate actions. Short positions allow you to make money even in a falling market.

Remember: With spread betting you can potentially put forward small initial stakes that can yield big, quick returns but also risk potentially large losses. We often stumble across advertisements from trading courses teaching beginners how to make bucket loads of money through trading via spread betting. What these courses don’t say is that traders require a great deal of expertise to make the potential high returns.

Remember: Telling a novice to dive into CFDs and spreadbetting without taking the time to educate oneself about the product is like telling a first year infant to look into the complete works of Shakespeare. Don’t run before you can walk!

The moral? Learn as much as you can before you go in for spread betting, then learn some more…

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