What Is Spread Betting?
If you've found your way to this tutorial, you probably already have a basic understanding of what financial spread betting is and how it works. While on the face of things, spread betting appears to be a comparatively simple style of investing, online forums are littered with stories of significant failures with spread betting, such are the dangers of underestimating its impact.
There have been countless volumes published from analysts, traders and amateur investors alike looking into the finer points of spread betting. With that in mind, getting a broad and comprehensive understanding of how the mechanisms of spread betting work is essential for anyone looking to build a successful trading career.
Spread Betting Defined
Financial spread betting is the process of trading ON markets, rather than trading IN markets. A financial spread trade is essentially nothing more than a bet (hence the terminology of spread 'betting'), or perhaps more accurately a contract made with a spread betting broker on the future movement of an underlying market or index as contrasted with today's prices.
Traders pick a direction of market movement - either up or down, known as 'buying' and 'selling' - and place a stake per point on the trade. For every 1 point the market rises beyond the buy price in 'long' trades (i.e. those trades that predict a rise in the market), the trader earns an additional multiple of their stake. For every 1 point that moves against the trader however, his liability increases by an additional multiple, thus the liability of a particular trade isn't limited to the amount of the original stake.
This process of adding and subtracting multiples is primarily what attracts traders to invest in spread betting. While spread betting is in practice quite distinct from gambling, the returns that can be afforded by spread betting are easily comparable, thanks to this multiplying effect - known as 'leverage'.
Leverage is arguably the most central feature of spread betting, and the one highlight that makes it so popular. Because markets can move by a wide range of points over the space of a day, immediate returns can run into the hundreds of percent, and despite the comparatively massive risk profile, these rewards are still hard to beat elsewhere.