The basics of financial spread betting explained plus top spread betting tips.
What is spread betting?
Financial spread betting allows you to benefit from movement within the stock market and a number of other financial indices and markets without actually purchasing the stock itself.
It is based on the traditional spread used in the purchase of shares and is defined by a lower 'sell' price and a higher 'buy' price.
One of the main advantages of financial spread betting over traditional share dealing is that spread bets can be placed on the downward movement of an index or share price and so it is often used to hedge against losses made from decreasing share values.
Basic spread betting techques
Here's an overview of the basic financial spread betting strategies:
If you believe the value of the subject of your bet will rise compared to that quoted in the spread you 'buy' - although this is only theoretically, you never make an actual purchase.
Cnversely, if you believe that it will decrease you 'sell'; again this is based on the theoretical sale of shares you don't actually own but later hope to buy back at a reduced rate.
If the index has moved in the right direction between the time you buy and sell (this is specified by you as the spread bet can be closed at any time) your profit will be the increase in points or value multiplied by your stake per point of movement. Conversely, if it moves in the wrong direction this will be the amount you owe.
As there is no limit on the number of points above or below the spread that your chosen index will rise or fall, your potential profits in financial spread betting markets are uncapped. This means that you could see a much greater return than you would have it you'd simply invested in the commodity itself.
However, as the returns can be magnified, so can the losses and if the market turns against your prediction, you will be responsible for paying out the difference.
This makes financial spread betting a very volatile 'investment' and you need to be fully aware of the potential losses before you start.
Most financial spread betting companies offer access to certain mechanisms which you can use to minimise the risk of a big loss. One example is a 'stop loss order' which closes the bet if the index moves a specified amount against your prediction.
Spread betting works on a margin basis, this means that when you place a bet via financial spread betting accounts you only have to hand over a deposit instead of the full bet amount.
Theoretically this means that you have more money to use in alternative investment opportunities, or conversely allows you to stake a larger position on each point in the bet than you would have been able to otherwise (known as gearing). However you must have access to the total amount to cover costs should the bet go against you. Some spread betting brokers offer credit accounts for this reason.
A major advantage of spread betting is that although many consider it to be a form of financial trading, because of the high level of associated risk it is classed as gambling under British law and so is exempt from capital gains tax and stamp duty meaning that all profit made in the spread bet is kept.
Although financial spread betting can be an exciting way to make potentially unlimited profits, it is also a highly risky form of 'investment' and so should only be undertaken if you have other secure financial arrangements in place and have access to the finances to cover any losses.
Additionally, it is important to bear in mind that like winnings, unless you place a stop loss order on your bet, your potential losses are also unlimited. For this reason it's important to thoroughly research your bet prior to placing it and choose the best spread betting platform so you can easily and quickly monitor and control your bets.
As long as you 'play' with money you can afford to lose, research the object of your bet thoroughly and guard against potential losses, financial spread betting online can be a highly exciting and profitable way to gamble with the stock market.
If you're new to spread betting it is a good idea to build your experience using a spread betting demo account before you risk any of your money. Getting practice with a financial spread betting simulation in this way is a safe means of familiarising yourself with the techniques you'll need to master.
