I was initially put-off spread betting by my lack of experience of the financial markets, compounded by some of the jargon and terminology used which led me to think that financial spread betting is actually more complicated than it is. But whilst getting hang of some of the more intricate details and learning the best techniques for making a profit is certainly taking its time, understanding the basics of how to spread bet is actually relatively straightforward especially when compared to some other forms of financial trading and there's no reason to think that inexperience equates to zero chance of profit. After all, we all have to start somewhere.
As you may already know, rather than owning an asset such as with traditional trading, with spread betting you merely bet on whether you expect its value to go up or down relative to the predicted range offered by the spread betting company. If, for example, you believe the value of an asset is set to rise in the future you would 'buy' the selected instrument, known as 'going long' in market terminology. If you feel that the asset price is likely to fall in value, you can place a 'sell' bet, also known as 'going short'. When choosing an asset to bet on, you'll have a range of choices, sometimes stretching into the thousands.
Spread betting on forex is one of the most popular options, as is spread betting on indices, such as the FTSE (UK 100), Dow Jones (Wall Street) and so on. However, it is also possible to bet on particular sectors, such as the UK banking sector, the share price of a specific company, such as Vodafone or RBS, commodities like crude oil and gold and treasuries, such as the Gilt or Bund. When you're getting started it may be wise to choose one or a select few instruments to trade on.
Once you have decided what to bet on, you must decide on your stake, i.e. how much you want to bet. In spread betting, this is done on a per point basis. So, for example, you bet £1 per point on an instrument, for every point (or pip) in value that asset moves in your direction, you win £1. Conversely, every point it falls in the opposite direction to your prediction, you lose £1. The size of your bet should reflect the confidence you have in your prediction but perhaps also the volatility of the market. I'd recommend starting small regardless or, even better, hone your skills with a spread betting demo account.
Finally, you need to choose the duration of your bet. This sets a date for when your bet will be closed finalising any losses or gains made. Many spread bettors will set their trades to expire at the end of the day, whilst another option is to set them until cancelled.
Hopefully, this gives you some idea of the fundamentals of spread betting. It is far from a comprehensive guide but should offer you a good starting point. In the next article, we'll look at some of the finer points of spread betting in more detail including all-important advice on protecting your winnings and managing your losses. Managing losses and making the most of winnings is essential to turning a profit in spread betting.
We've all heard of stocks and shares trading. But why do we keep hearing references to financial spread betting? The fact is that financial spread betting is one of the fastest-growing trading products in the UK and Ireland and steadily replacing traditional shares trading as the product of choice for flexible, tax-efficient trading. Not only that, but the fact that spread betting is traded on margin, it is often seen by traders (perhaps naively I daresay!) as one of the most exciting ways of speculating on the movements of an underlying share or index.
In simple terms, instead of buying stocks or shares that you believe are going to go up in value, you bet on whether you think they will go up or down. So if you believe Barclays shares are trading too low, you might 'buy' at £20 per point. Should Barclays shares move up from 350p to 360p, you have made 10 points, which translates into a tax-free profit of £200 (10 x 20). However, if they go down, say, to 344p, you have lost 6 points, which amounts to £120 (6 x 20). Simple, huh?
With spread betting you can make money on a falling market, or on a share price that is steadily losing value. You know how depressing it is to see the price of a share that you hold in your portfolio dropping in price, day after day. Your hard earned wealth is being eroded and your financial worth is being eaten like rust corroding your expensive car, or creeping dry rot is reducing your house to a point when it becomes rubble and has no value. The current share settlement system does not allow you to sell a share that you don't own (called 'short' selling), nor will an execution only stockbroker or a bank accept instructions to sell a share until you have placed the share certificate in their hands, or unless they have evidence that the share is registered in your name. But you can bet that the share price will go down, or up, without having to own the stock in the first place. Volatile markets and fast moving share prices are now a permanent feature of stock markets throughout the world. Short term trading has become much more widespread than it used to be. Until recently only those working in the markets were able to take advantage of the rapid fluctuations in prices. Now, with modern technology and instant communication systems, everyone can make money out of trading.
A number of specialist firms providing a spread betting service will offer both deposit and credit accounts, but in either case, you will need to be aware of the Notional Trading Requirement. (Yes, it is as dull as it sounds, but you need to know about it, so don't skip this bit. Here goes...) The NTR is the minimum amount of money required by the bookmaker to open a new position, and is a risk figure applied to each market that the bookmaker quotes, and it is what they see as a fair reflection of the potential daily volatility of that market. The figure varies from market to market, but if, for example, you wanted to bet £5 per point on the FTSE futures market, the NTR could be 300 times your stake, which would make the minimum deposit required to run that position £1,500.
Spread trading can be described as a short-term 'financial trading tool'. It is essentially short term and you can trade indices such as the FTSE 100, 250, the Dow - Jones, the S&P 500, the CAC, the DAX as well as currencies or commodities (such as gold or oil) and so on. It can be very exciting, and quite often it requires nerve and a cool head. It is not suited to everyone. Investors, as opposed to traders, who take a longer view and who prefer not to deal very often will not find spread betting attractive. However, there are many attractions attached to financial spread betting, and more and more people are using this rewarding form of investment. The two main ones are that you need very little capital although you can make a lot of money from betting successfully, and all winnings are completely free from tax. If you want to be a consistent winner there are some golden rules for you to learn. You must be able to read the signals that the market is showing you, and you must discipline yourself to bet only when the risk / reward ratios are in your favour. It can be great fun, and very profitable.
Spread betting, to conclude, is not suitable for long-term investment, or for placing your hopes, dreams, and life savings in, but can potentially be very profitable in the short term.
One of the key advantages of spread betting is leverage: you can trade with a lot more than you deposit. So with £20,000 you could actually gain exposure to nearly £200,000, if you wanted
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If you use the right tools, trade the right markets, apply discipline, protect your capital and try to learn from the good and bad trades then with practice you should make money. The spread betting company does not care whether you win or lose as they hedge most trades in the market. Their profit comes from the spread and it is in their interest that you at least breakeven over a period as you will then remain an active client. Current indicators are that a significant percentage of people using spread bets to trade will lose money. Take the time to learn the markets and techniques and be methodical and disciplined in your approach and be amongst the other percentage that actually makes money spread betting.
Let's assume, for the purpose of this exercise, that all the signals indicated that the FTSE 100 was very likely to rise in the next day or two. You would contact your financial trading broker to find out what prices they were quoting to 'Buy' the FTSE. (A 'Buy' signal is when the market is expected to rise, conversely a 'Sell' signal is when the market is expected to fall). They will quote two prices, a lower price to 'Sell' and a higher price to 'Buy'. You decide that you will trade £1.00 per point for every point the FTSE rises above your 'Buy' price. During that day the FTSE does rise and continues to rise the following day as well (each point the market rises, you have made a profit of £1.00). Lets assume that after the second day your data information signals indicate that the peak is likely to be reached very soon, so you now decide to 'Sell' and terminate your trade. Lets also assume - for the purpose of this example - that in total, the FTSE rose by 93 points - a profit of £93.00.
One of the main differences between spread betting and almost all other forms of investing is its hands-on nature. Investors make all the decisions themselves when they place a spread bet, as they do with execution only share trading. And it looks set to stay that way. One reason why spread-betting accounts do not figure in managed portfolios is because under an FSA ruling providers cannot give advice on spread betting. That won't change for a long time. I think this is where CFDs and spread betting may start to drift apart. CFDs are allowed in SIPPs (self-invested personal pension schemes) and most stockbrokers will advise on CFD trades. Spread betting will always be for speculators who want to make their own decisions while CFDs will be the instrument stockbrokers will use. We know they are similar products, but because of that tax angle I think one will always fall under an execution-only environment and a CFD will be used more and more in advisory and discretionary trading.' So if you have a spare £20,000, you effectively have £200,000 to play with in this market. But, as always, diversity is the key. And if you want to use £20,000 in the spread-betting arena all you really need is £2,000 and a clear strategy. |
Of course, the level at which you enter the market is up to you. You could for example choose to trade, say £10.00 per point. Using the same profit as above, that's 93 points X £10.00 = £930, or 93 points X £20 = £1860 or 93 points X £50 = £4,650. That's not too bad for two telephone calls and a few calculations is it? Of course, if your indicators predicted the markets to fall, you would instruct your broker to 'Sell' the FTSE and the same principle applies as in the above example but in reverse, i.e. The further the market fell, the higher your profit would be.
The above scenario is not unusual, in just one day in March 2009 the DOW index rose by over 200 points, another example in April 2009 saw the German DAX index fall by over 100 points in just a few hours. In May 2009 the FTSE index fell 65 points during an afternoon's trading. July 2009 saw the French CAC index fall over 400 points in just 4 days. More recently, in May 2010, the DOW fell over 950 points in what become known as the Dow Jones 'flash crash' and in June 2010, the DAX rose by more than 300 points in just a few days.
Spread betting, as such, is not new. Financial Spread Betting has been in the UK for almost 30 years. Spread betting evolved in the mid-1970s when a British sports bookmaker devised an esoteric, high-risk means of gambling on the future of market indices that in time became popular on sporting events too. The advent of small investors in the stock market has fired the current boom in financial spread betting. Today 80 per cent of all financial spread betters are ordinary retail investors and bets can be made on the future movements of just about any indicator including indices, share prices, currencies and commodities.
Some prefer to call the stock market version 'spread trading' because - once you have learned how to trade - you use your knowledge, skills and experience in order to reach your trading decisions, just as if you were trading in the traditional manner. It is not gambling at all, but it is called "betting" in order to use current UK legislation and thereby avoid UK income tax and capital gains tax on profits.
Risk Disclaimer: Trading is Risky! 74 to 89% of retail investors lose money!
Visit our spread betting guide if you wish more information on this financial product. Financial-Spread-Betting.com is also a vital read for anyone who is serious about spread betting and day trading. Interested in learning the workings of spread betting? Whether you are new to spreadbetting or looking to expand on your current knowledge, our comprehensive spread betting guide covers all the key topics related to spread trading.
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