With typical investments, you will make a profit if they rise in value and lose money if their value falls. By contrast, if you choose to place spread bets, you are not buying anything, just betting on whether the value of that asset will go up or down.
The first step if you want to engage in spread betting is to set up an online account, ideally a demo account to practice, with a regulated broker. Then you could start researching markets and create your trading plan.
What are the major advantages of spread betting?
This type of trading is one that some people opt for because it has some interesting advantages. These are some of the main benefits that can accrue from placing spread bets.
· The leverage is advantageous
Trading on the financial markets conjures up images of ultra-rich people in high-end London offices buying and selling the stock for vast sums of money. That makes it seem out of reach for most people, but that is not the case with spread betting.
The leverage involved in it means that the person placing the bet only has to put down a fraction of the value of what they are betting on to open a position. The money that you put down is referred to as the margin.
An example of how it works would be if you are betting on shares worth £1000 with a 20% margin. In that situation, a spread bet of £200 would need to be placed.
That makes it an appealing way of trading for people who want to make their capital stretch. Bear in mind that both profits and losses are worked out according to the full position (£1000) rather than the margin (£200) though.
· The tax situation is appealing
More traditional forms of financial investment within certain sectors, for example buying shares in the stock of a company, will leave you liable for capital gains taxation on any profits that you make. By contrast, spread betting profits are exempt from this tax in the UK and Ireland, helping you to maximise your return from these bets. Note that tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.
· Wide market access
Spread betting is a unique way of trading in terms of the sheer number of markets that it lets you bet on. From commodities and indices to the foreign exchange (forex) market and stocks and shares, many brokers offer more than 10,000 different financial instruments to choose from.
As a newbie trader, you have the option to stick with what you know or place your bets across a wide variety of options for diversification.
· Profit potential
Most forms of trading will only see you make money if the asset that you have bought or invested in rises in value. If its value decreases, you will lose money on your investment.
Spread bets differ from this in that you are not investing in or buying the actual market asset. Instead, you are wagering on whether its value will rise or fall.
Bets on the value rising are known as taking a long position, while ones, where you are betting on a drop in the valuation, are called taking a short position. What it means in practice is that you have two potential ways to profit from your trade rather than just one.
What should newcomers bear in mind?
Perhaps the single most important thing for people new to spread betting to remember is that it is still possible to lose heavily. Furthermore, any loss will be worked out based on the full position, which is always higher than the margin that you bet.
It can be boiled down to this: should the market that you bet on rising 20 points in value, you will profit by 20 times what you bet. On the other hand, if you take a long position and the market drops 20 points in value, you will lose 20 times what you bet on it.
There are plenty of plus points to spread bets that make them well worth exploring but it is best to practice with a demo account if you are new to the game.
Spread betting is something that could be profitable and rewarding if you are careful to complete your due diligence and make efforts to minimise risk.
*Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
*Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.