Spread betting is an option to conventional investing in which the goal is to profit from movements in the value of financial product. The rewards and the risks are much more higher than traditional trading.
Spread betting came a long way over the past two decades, wherein it is seen as a high risk option to the high-street bookie for sports nuts in today’s spread-betting aficionados thinking of themselves as investors.
In simpler terms, spread betting is a way to trade in order to benefit from the movements in the value of underlying financial products namely; stock market indices, individual shares, currencies, bonds and commodities. Traders can generally bet on these aforementioned products rising in value at the same time betting on a fall in price which is much difficult to do with traditional investment.
With spread betting, there is never actually hold to the underlying financial product. Instead, there is buy and sell on the amount per point, with each point necessarily corresponding to a unit of the asset in question.
For each point the price of the asset move further in their favour, they basically get multiple stake. Similarly, if the price moves against the trade, the one making the trade loses the multiples of the stake.
Spread betting is a geared investment, they only require a relatively small stake down to secure exposure to a much larger position. With this kind of gearing comes a higher risk and reward profile which can lead to a hefty profit many times the original stake but at the same time can equally lead to loses much more than what was originally invested.
There are several accepted approaches to safeguard profits such as a stop-loss which automatically close out the bet once losses hit a certain level. The only drawback is that traders utilising this instrument must accept the risks of spread betting before actually placing a trade.
In practice, most spread betting firms provide demonstration accounts to new customers which will enable them to place theoretical trades for a period in order for them to get used to the concept of the practice.
These accounts can be a good way to get used to spread betting. There exists a far broader range of investors trading in this manner. There is now a much broader range of investors trading but there still exists traders with very little experience in financial trading involve with spread betting for the first time.
Part of the appeal is the very broad number of underlying financial assets in which spread betting provides a way of getting the added exposure. In some cases, retail investors would find it prohibitively expensive or even near impossible to gain access to these assets. Betting on a stock market index for instance is actually very difficult for an ordinary investor more so with actually investing in currencies, oil or gold.
U.S. shares, specifically the technology sector are very popular with spread betting traders along with IPOs that are not open to smaller investors. All the more so given with the growing popularity of spread betting applications on smartphones and tablets which enable investors to stay in constant monitoring with their financial positions. One of the most common problems for non-professional investors is the lack of time they have to focus on their respective trading investments.
Spread betting trades placed via tablet or mobile now accounts for approximately half of current dealings. The rapid development of such facilities by spread betting companies nearly took the market share from traditional investments companies which have been less agile in providing investors with access to new technologies.
The other area where conventional investment sector has difficulty with is competing with spread betting. Although investors generally have to pay capital gains tax once profits reach a certain level, spread betting gains are basically tax free. Nor do investors with spread betting service providers have to pay 0.5 % stamp duty charge on direct investments in majority of financial assets.
This tax advantage will generally not make spread betting a much better option per se but it has provided investors a more active incentive to think about. Some are undoubtedly put off by the higher risks, specifically the fact that traders can lose more than what they initially invested. Still, many are still enticed to shift to this non-conventional trading approach due to its appreciative accessibility.
How spread betting actually works in practice
To place a bet traders will be needing a certain amount of money with enough margin to cover the position. Different spread-betting companies have different rules and the amount of margin needed will differ accordingly to what will be at stake.
Before a FTSE 100 bet, a 0.25 % of the value of the position is typically a common option. In this case it would be £83.76 (0.25 per cent of £5 times 6,701).
Traders normally would act on their intuition and instincts. Should the move be favourable and that FTSE 100 moves to let us say 6.750 at which stage spread betting firms offer a price of 6,749- 6,750. Traders can close their bet by actually selling at 6,749, netting you profit of £240 (£5 times the 48- point rise).
Traders can also bet on falls if the price is exactly the same way by selling certain amount per point. The principles of spread betting are closely identical to whichever market they choose to bet on. Although winnings can be open-ended, it is very possible for traders to lose more than what was originally invested.