Financial spread betting is one of the easiest and cheapest ways for you to back your predictions with cash. But you need to be careful if you want to maximise your gains while minimising your losses. We explain why.
If you believe the FTSE will rise, the price of oil will fall or the value of the euro will strengthen against the dollar, spread betting lets you back all of these hunches with money.
And, if you’re right, you can make significant profits quickly.
However, if you’re wrong you can lose a large amount which is why spread betting is risky and not for the faint hearted or those that can't afford to lose.
It's for this reason that you need to understand exactly what financial spread betting is and how it works and why you should research spread betting companies before you start betting.
What is financial spread betting?
Financial spread betting allows you to bet on whether the value of a financial asset will rise or fall.
Financial assets in this context include individual share prices, share indices (the FTSE 100, Dow Jones) and commodities such as oil and gold.
When you make a financial spread bet, you don’t actually buy or sell the underlying investment. You just predict whether the value of the investment will rise or fall.
For example, the price of oil may be $100 a barrel. You think the price will rise and so you ‘buy’ the price of oil at $100 for £10 per $1.
This means that for every $1 the price of a barrel of oil increases, you will profit by £10.
So, if by the end of the day the price of a barrel is $105, you can close out your bet and make £50 (£10 x $5).
However, if the price of oil had fallen to $95 in the same period, you would lose £50 (£10 x $5).
How to compare spread betting accounts
There are lots of spread betting companies who are competing with one another to accept your bets. So, before you start betting, it’s important that you choose the best spread betting account for your needs.
When undertaking a spread betting comparison, consider the following:
- What is the ‘spread’ (the difference between the ‘buy’ and ‘sell’ price) of major indices/commodities? Generally, the smaller the spread, the better
- What are the minimum/maximum bets per point?
- Does the company allow virtual or mobile trading?
- What is the initial margin requirement (you use this to work out the minimum accepted bet)
- Whether tools like a guaranteed stop loss are applied to the account
It is also worth considering whether companies have any financial spread betting offers for new clients. For example, some companies offer cashback or initial bonus credits when you open a new account.
