Spread betting can be very very risky, although you can potentially profit big time, unlike fixed odds betting, you can lose a heck of a lot more than your initial stake.
It’s tax free
Profits from spread betting are currently free of capital gains/income tax in the UK. Always nice to save an extra 40% of your profits isn’t it?
It’s not that complicated
The basic principle of spread betting isn’t that complicated. You basically bet on a market (a share or stock market or commodity) increasing or decreasing in value. Ever ‘point’ that a market moves in your favour you win a multiple of your stake.
Here’s an example:
Let’s say a financial spread betting company offers a spread of 10000–10004 on the price of the Dow Jones Industrial Average. 10000 is the ‘sell’ (or bid) price and 10004 is the ‘buy’ (or offer) price.
Suppose you think the index is going to rise. You make a £10 per point “buy” bet at 10004. Over the next few days the price does rise, and the spread quoted by the indexation company moves upward to 10050–10054.
At this point you might choose to “take your profit” and the way you do it is by making a £10 “sell” bet at 10050. Your profit on the two transactions would look like this:
Bought at: 10004
Sold at: 10050
It can be used to hedge other investments
If you’re concerned about the weakening of the pound or the rise in oil prices, you can actually use spread betting to offset potential losses cause by both of these trends. For example you could take out a spread bet on the Euro so you gain as the value of the Euro rises. Same thing for oil, use a spread bet to ‘buy’ oil, i.e. bet on the price of oil going up and you might just make back a few pounds to offset the rising price of running your car. Of course you can also hedge any traditional shares you may own, or investments you might have in stock market tracker funds.
It’s called a chart
The advent of spread betting has not only democratised access to international financial markets (do you know another way you can trade on oil without having a spare £100,000 laying around?) it’s introduced advanced market analysis and charting tools to a wider audience. A lot of spread betting enthusiasts sign up for stand-alone market analysis and charting tools, as well as using those available from spread betting providers. This means that you can theoretically be a lot more rational in your investment decisions.
It’s a great way to profit in a recession
The FT recently reported that spread betting volumes had doubled in 2011 compared to 2007 compared to a decline in traditional share trading. The fact that you can bet on a market (share, commodity or stock market) losing value means that you can actually make a profit in falling markets when you use spread betting. This opens up a lot more opportunities to make money on the markets if you get it right.
It’s possible to limit your risks
Spread betting providers now all allow spread betters to place stop orders on their trades. This means you can limit your risks in volatile markets by setting a certain price that your trade will be closed if markets move against you. For example if you place a £10 stake bet on the shares of company ‘A’ going up when they are at a value of 560p you can put a ‘stop loss’ at 540p to limit your loss to £200. This is calculated by subtracting your stop loss price level (540) from your buy price (560), i.e. 560 – 540 = 20 X £10 (your stake) = maximum loss of £200. Placing a stop loss is very sensible, but sometimes they won’t be tiggered in very violent market fluxuations.
It’s a great way to invest in loads of different markets from the same platform
Spread betting really opened up the world of investment to the average investor. Where you previously had to have very large amounts of money to invest in a stock market or in a commodity (e.g. oil, gold etc) you can now access and trade on the value of these markets all from one web-based spread betting platform.
It’s possible to start small
It’s understandable that the cencept of risking your hard-earned cash to bet on market fluctuations can be very intimidating and daunting. The good thing is that a lot of spread betting companies offer demo accoutns where you can paper trade to build up your confidence. Other providers also let you start betting with very small stakes (that means that if the market does move against you, your losess will be smaller).
Most of the major spread betting providers have all realised that helping newcomers learn about spread betting is important and beneficial. Because of that you can find a wide range of free spread betting seminars and webinars as well as spread betting guides and tutorials to help you learn more about how it works and how you can potentially profit. None of these will instantly make you a successful trader but they are very useful.