Trading 101: Spread Betting Explained

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Spread betting‘s reputation usually precedes it. Ill-suited to the conservative, the faint of heart, or the risk averse, it carries gambles as great as its potential gains, and this means that it takes a very special sort of trader to take full advantage of it.

For those who enjoy the occasional throw of the dice, however, it can be perfect. Spread betting offers extensive opportunities to turn a profit, and any money that traders make is entirely exempt from taxes. Its extreme flexibility, and the ability of traders to take advantage of any situation, only add to its allure.

Yet it remains widely misunderstood. If you’re thinking of giving it a go yourself, then here’s a handy guide to help you…

The Mechanics of Spread Betting

Spread betting is an investment instrument, yet it differs from its counterparts in one key way: you never own the assets that you’re trading. Unlike its alternatives, the fate of the commodity itself will not impact you; it’s simply a case of whether you called its future correctly.

You see, spread betting involves making a call on whether an asset will rise or fall in value. A loss can be exactly what you’re searching for, provided that it’s what you predicted when you placed your bet.

The Bet

Spread betting offers investors the chance to gamble on the future of an asset, and this means that movement both up and down can yield profits. The aim is to correctly assess which direction the commodity’s value will take, and then to stake a set amount of money on every point that the asset moves. The more it moves in your favour, the greater the profits you’ll earn; the more it moves against you, the higher your losses will be.

The Spread

The concept of spread is simple to understand, but you need to be able to correctly read them in order to secure market successes. Essentially, the spread is the disparity between the price you purchase your asset at, and the price you sell it at.

If you think that its value will increase, you ‘go long’, which means that you buy at the higher price. If you feel that its worth will decrease, on the other hand, you ‘go short’, selling at the lower price. The tighter the spread is, the less market movement required for you to make some money.

Placing a Spread Bet

Placing a spread bet is a four step process.

#1: Select a Market

Spread betting spans a wide range of assets, so you need to begin by selecting a market and commodity.

#2: Check the Price

Once you have settled on a commodity, you’ll need to look at its price. This will be presented as two figures, such as 648-651. The lower of these will be the ‘sell price’, whilst the higher is the ‘buy price’. Looking at the current value of your asset, you need to decide whether you think the price will rise above the higher figure, or fall below the lower. In either scenario, you have the chance to profit, so you will either buy or sell the commodity accordingly.

#3: Decide Your Stake

Once you have reached a decision, you’ll need to assess how confident you are in its correctness. If you believe that it’s almost inevitable that prices will rise, for example, you will place a higher stake than if you think it is only reasonably likely. Thus, the amount you choose to risk on either gains or losses per point of movement should reflect the perceived level of risk accordingly.

#4: Close Your Trade

Once your bet is live, you will be able to close your trade at any time. This means that you can wait for the most opportune moment, in order to either maximise your profits, or else limit your losses.

The Advantages of Spread Betting

Spread betting enjoys a strong fan base, and there are many aficionadas who will sing its praises to all who care to hear them. They are not wrong, and although the risks of spread betting cannot and should not be ignored, its many boons should also be touted. They include…

Tax Exempt Profits

Unlike traditional forms of investing, spread betters are not liable to pay taxes on their profits. This means that any gains you make are yours and yours alone, and can be spent in any way that you wish.

No Fees

As a rule, spread betting companies will not charge you commission or brokers fees on top of their prices. Rather, they factor these costs into the spread, so that you’re only paying out the amount you hand over when you place a bet.

Flexibility

Spread betting is particularly well-suited to those who enjoy the occasional gamble, and those with an eye for a chance will appreciate the ability to profit from both rises and falls in market values. This means that whatever the individual fate of an asset is, you need never share in its decline.

Simplicity

A major deterrent for many would-be traders is a lack of understanding, but spread betting is an incredibly simple concept to grasp. The terms and calculations involved are far less complex than those associated with options, futures, and their ilk, offering you a much improved probability of being able to master the markets.

Extensive Options

Another attraction for those who throw the dice and throw in their lot with spread betting is the wide array of markets that are available to choose from. This offers almost limitless opportunities to profit, through assets as diverse as stocks, currencies, and even house prices.

Control over Losses

Spread betting is inarguably high risk, but it is not entirely a game of luck. It is eminently possible to wrest your fate from the greedy hands of chance, and place control of it into your own. The tool for doing so? Stop losses. Use them properly, and they will shield you if ever your instincts prove erroneous.

Why not give spread betting a go today?

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