If you’re speculating on the markets, and you’re also looking for a method that offers a more extreme Risk/Reward ratio, definitely check out spread betting, and definitely read this article. I’m going to help you understand the ins and outs of this complex system, from platforms to trading strategies, this article will expand on everything you need to know to get started with spread betting and, hopefully, become a master of the art.
Spread Betting Brokers
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What Is Spread Betting?
First thing’s first; what is spread betting? Essentially, it’s a mechanism of trade that opens several different markets to the trader, and all through one broker. Check out the list below for examples of the markets you’ll have access to:
- Commodities (gold, silver, aluminum)
- Cryptocurrencies (Bitcoin, Ethereum, Ripple, Litecoin)
Instead of having ownership of a particular asset, like a unit of any type of bitcoin, spread betting is basically following the asset and speculating on the likelihood that the security price will increase or decrease. This speculation is constructed around the prices that are displayed by individual brokers.
This is looked on as a type of gambling in the United Kingdom. You can use that term if you like but, European aspersions aside, spread betting is fully regulated FCA.
Astute traders using this instrument will sharpen their skills and find ways to utilize its unique qualities to a degree that rivals traders working with more traditional means; like day-trading and futures and the like.
How Does It Work?
Ok, compared to a CFD, which is essentially an agreement to trade the value of an asset when the contract was open, for its value when the contract was closed, spread betting is an actual trade on the future of the asset. And you actually trade as well, instead of just “betting” on the asset. After that, you hold your ground during fluctuations, and wait for the right moment.
A “spread” is a just an educated guess, a prediction on the direction the market (and the value of your asset) will go over a given period of time. It is the “distance” or spread between the starting and ending values of an asset. The “betting” comes in when you, the trader, trades on the accuracy of that broker’s prediction.
In practice, and theoretically after you’ve done some homework (please research your bets carefully. As I mentioned, this market is highly volatile, offering a greater risk/reward ratio), you sell if you thin your broker is overshooting the future value, or buy if you think they’re prediction is too low. Simple as that.
Spread Betting Example
Ok, you sit down to look at what your broker is predicting for the day, and you see that they are speculating that Applied Graphene Materials, which started the day at 115p, will be at 116p by close of day. But you think that the share will close at a higher rate, so you buy $100 per point movement.
You put up the cash, and now you wait for the closing value. If AGM closes at 120p, that’s 4 points higher than the buy price of the firm; so you just made $400. Well done you. But, if the firm closes at 114p, which is two point lower than your buy price, you’ll end up losing $200. See what I mean?
Advantages of Spread Betting
A large number of people are funneling into the spread betting game every day, and for good reasons. I’ve listed some of those reasons below:
- Tax-free – Everything you make, all your capital gains from spread betting in a day, are exempt from taxes. It’s true that speculating in this way may obligate you to significant taxes overall, spread betting itself is free from any and all tax, including capital gains and stamp duty. That is a huge draw for traders of all kinds.
- Minimal capital required – If you’re trading with more traditional instruments, you’ll be obligated to put up far more capital for an outlay similar to the example I gave with AGM. Tens of thousands of dollars would be necessary to have access to the same exposure; this makes spread betting an attractive instrument.
- Regulation – Highly regulated instruments like spread betting protect a trader form everything from scams and con-artists, to a whole host of other market related dangers.
- Access – We all know that the more restrictive a tool is, or rather, the fewer options it gives you to structure your trading around your particular lifestyle, the harder it is develop consistency and skill in the market you’re looking at. Spread betting is highly flexible, giving you access to several markets such as equities, cryptocurrencies and interest rates. Not only this, you can also trade 24 hours a day with spread betting. And even though not all markets are available at all times, the ability to pick when you trade, unrestricted by your instrument, is a big draw for aggressive traders.
- Commission-free – If you’re the kind of guy that’s making several trades every day, a mechanism that incurs even a small commission is likely to dissuade you from considering it. Spread betting usually doesn’t include commissions on trades, instead including the cost in the spread itself.
- Leverage – Quite a few brokers offer leveraged trading, and while this does allow you to increase your position size by borrowing capital, increasing the potential for gain, it also proportionally increases your risk of loss. So, take that with a grain of salt.
- Arbitrage or Hedging – If you combine spreads, this may result in something called “arbing” which you should read about here. It’s short for arbitrage and it allows a trader to effectively hedge other derivative holdings to their advantage.
If you read what I’ve got coming up, and it sounds appealing to you, you may like the prospect of spread betting a s full time career choice.
- You’re sick of limited asset class access, and you want more options.
- You don’t want to pay tax on direct profits.
- Instead of simply speculating on the rise of asset’s value, you want to be able to bet on decline as well.
- You want to trade in Sterling, even if you’re interested in the wider international markets.
- You want the benefits of trading frequently without suffering the commission rates.
Risks of Spread Betting
I’d be remiss if I didn’t give you the full picture here, which includes the “cons” of spread betting as well as the potential pros.
- Loss potential – I probably don’t have to tell you that it’s a bad day when you lose more than your initial investment, and your getting calls from your broker because he wants his money. You must pay close attention to your risk and positions. In fact, brokers are required to publish and display openly their “risk of losing” percentages to avoid liability.
- Addiction – Remember how we mentioned that the EU essentially calls spread betting gambling? Well that criticism isn’t exactly unfounded. A trader can easily find him or herself in a situation where you are essentially just gambling, because they overtraded. It is literally the worst thing you can do to yourself as a full time or part time trader in this market.
- Expensive bid-offer spreads – The best advice I can give you before getting started, other than encouraging you to do your homework, is to extensively research the brokers you’re looking at dealing with. Many brokers who offer non-commission trades compensate that loss by bid-offer spreads, or bid-ask spreads. This can sneak up you pretty quick if you haven’t looked into it carefully enough.
- Legality – It is absolutely illegal in the United States and Japan, but not in Britain or Canada. Find out if it’s legal where you live before getting started.
Before you get lost in the intoxicating potential of spread betting, with gleaming eyes and dreams of yachts, you should make an effort to understand the risks involved. Th best traders are the diligent, realistic investors.
Spread Betting vs Share Trading
Some people rightly question why you’d opt for spread betting over the more traditional share trading. With share dealing, you purchase a physical number of a company’s shares, e.g. Apple, and sell them in the hope they have increased in value to make a profit.
However, you can only turn a profit if the share price increases.
With spread betting, you can enter positions on any price movement on a company’s shares. You can place a spread bet trade on a plummeting share price.
This is known as ‘going short’, or simply a ‘short’ . With traditional share dealing, you simply do not have this option.
Also, you do not own the actual shares with spread betting (they are a derivative). This means it often requires far less capital.
This makes spread betting ideal for beginners and those with limited capital. So, if you’re considering spread betting vs stock broking, binary options, futures trading, or long-term investing, you’ll often find the former is often an attractive proposition.
I’ve assembled a glossary for you to familiarize yourself with the terminology. Education is where you’ll find an edge over the competition.
- Bet size – The bet size is the calculation of how much you can lose or gain on the point movements in the market you’re looking at.
- Spread/Bid/Offer spread – This the literal range (125p to 130p) over which the firm is predicted to shift in a given trading day.
- Controlled risk bet – Typically, you should expect to pay some premium for this kind of bet, but it essentially protects you from incurring a greater loss from a downturn in the market caused by some major event that ripples through the trading world. This gives you what’s called a guaranteed stop.
- Down bet – This is one of the best functions of spread betting compared to other instruments. It