5 Myths about Spread Betting

Despite the astronomical rise in popularity spread betting has seen over the last five years, many traders are still quick to criticise this potentially lucrative method of trading, and there are a number of common myths floated by individuals who haven't yet experienced spread betting, or who don't understand the intricacies of the format.

Fortunately, the majority of these rumours are just that, and have no basis in fact whatsoever. Even large institutional investors like pension funds and insurance companies invest heavily in spread betting positions. Here's our quick debunking of a few all-too-common myths you'll no doubt hear about spread betting.

Myth #1 - Spread betting is too complicated for the average investor

This myth is one that, for the uninitiated, might seem quite plausible. After all, looking at a list of spreads might seem like quite a complicated visual, and one that is difficult for beginners to get their head around. In actual fact, spread betting is considerably easier than many alternative forms of investing, and within about 10 minutes, it's straightforward enough for even a total beginner to understand how spread betting works and how you can make money.

Myth #2 - Spread betting requires a level of capital beyond the reach of the new investor

This is simply not the case. Many spread betters start off placing tiny stake amounts, and it would be feasible to start spread betting with an account less than £100 in value. Of course, the more capital you have to play with, the more likely it is you'll make a decent return, but you are by no means limited to investing hefty amounts to access the markets. As a result, many traders who are priced out of the traditional securities and derivatives markets turn to spread betting as a lower barrier to entry alternative.

Myth #3 - Like other forms of gambling, the odds are always in favour of the house

Firstly, spread betting is only technically gambling and is much more akin to trading than it is to betting. While it is true that the broker always builds in a commission component (known as the 'spread'), it is not the case that the odds are stacked against you as with actual gambling. In fact, the odds in spread betting play very little role, in that it is the behaviour of the market that dictates whether or not, and by how much, you are successful.

Myth #4 - Brokers cheat their clients by giving inaccurate market data

Often the cry of frustrated traders still smarting from their losses, the implication that brokers deliberate cheat their clients is one that must be refuted. The rogue element of regulated brokers is minimal, and brokers trade off the back of real market data rather than trying to cheat their way to profitability. After all, brokers make enough money as it is, and want your repeat business, rather than being the short-sighted scoundrels some traders suggest. This myth emanates from traders who feel frustrated that despite their best efforts they continue to lose more often than they win, but unfortunately that's simply down to the complexities of the markets rather than any underhanded broker conspiracy.

Myth # 5 - Spread betting is dangerous

This one probably stems from traders who've found it difficult to master spread betting and who have failed to see any great reward for their efforts. Spread betting is only financially dangerous if you're trading blind - that is, essentially, if you don't have a clue what you're doing. Anyone who wants to make an impact as a spread traders needs to know how the system works, how the markets operate, and what risks they are taking on board. Spread betting can be dangerous if you take unnecessary risks, but there are mechanisms in place to prevent you from losing vast sums of money, particularly stop losses, which are designed to present the runaway risks that are often paint spread betting in a negative light.