Spread betting provides a variable opportunity for traders to generate a return, defined by the points spread and the distance between the spread and the closing price of the base index. For some transactions, earnings can be significant, with the stake multiplying with every PIP (percentage in points) movement in a favourable direction. With such a high earnings potential for traders, the potential risk exposure for the brokers would at first seem significant, and it would appear that super-successful traders run the risk of causing serious financial damage to spread betting brokers as they generate their income. In actuality, the construction of the spreads offered is designed, much like a bookmaker’s odds, to weigh in favour of the house, to help better guarantee the profits of the broker.
Make no mistake about it – brokers are no slouches. They invest heavily, both in time and resources, in analysing and understanding the markets they quote, and anything short of this dedicated, focused approach would be madness. The spreads that are quoted on the various different markets offered by spread betting brokers are designed to deliver two key benefits to the broker.
Firstly, and perhaps most obviously noticeable for the trader looking at the prices on offer is the spread itself. When quoting markets, brokers will quote a buy price and a sell price, with the middle ground unaccounted for. This middle ground, represented by the gap between the buy and sell price, is a built in commission for the broker, and delivers the first earnings opportunity from a transaction for the broker. For example, if the spread between the buy and sell prices is 2 PIPs, the trader starts the transaction 2 points down (or 2 times their stake in debt to the broker). This serves as a form of handicap for the trader, who must by definition gain 2 points to break even on the transaction.
Secondly, in calculating the spreads they offer, spread betting providers also build in a much more subtle handicap for traders, but one that is nevertheless of equal importance to traders looking to make a successful transaction. The spreads that are quoted take into account market forecasts and projections made by the brokers, for example, the spreads are always wider on more volatile and illiquid assets.
You could be forgiven for thinking that the calculation of spreads makes spread betting a less attractive investment style. In fact, the opportunities for profiting from spread transactions remain in spite of these handicaps, and simply mean traders have to work harder and smarter in order to deliver their return.
How to Spread Bet
So we know the reasons investors from different backgrounds turn to spread betting in addition to (and sometimes in preference to) other trading styles and practices. But how do these people actually spread bet? What is the approach they use to identify profitable opportunities, and how do they conduct their trading activities to deliver a return on their investment?
Spread betting is conducted directly with a broker, and usually now takes place through a virtual interface, which will enable you to view your account data, size up positions before you invest and ultimately directly execute your trading decisions. From there, it’s a case of buying and selling positions to open and close your exposure to a particular market, and all fees and costs are covered automatically from your trading profits. Process-wise, actually trading is the easy bit – the real difficulties lie in identifying what the right markets and the right times to get involved in a particular position, and that depends to a large extent on having a number of tools at your disposal.
The act of spread betting in terms of purely executing trades is fairly straightforward once you’ve got the right tools in place to make sensible trading decisions. Aside from an account with a spread betting broker, which is arguably the most basic of tools for executing spread betting transactions, you also need as an essential part of your trading equipment access to the financial media throughout the day, and an organized approach to following current affairs and anticipating market reactions to future events.
It’s vital that you are in a position to act quickly in order to make the most of different outcomes, and that means keeping on top of what’s going on in the world and the markets around you. Gleaming information from current affairs is the lifeblood of financial trading, and it can be of critical important to your spread betting success. That means keeping a close eye on online media, including blogs and forums, as well as TV and print press so you understand exactly what’s going on, and what’s likely to impact the prices of the markets in which you deal.
It is also advisable that you find a charting package that works for you in order to give you the best chance of identifying price trends and future movements. Technical analysis tools form the staple of any spread betting toolkit, and while there will probably be some degree of analysis afforded by your trading platform, it might be worthwhile to invest in other tools which enable you to determine and analyse price data and make future investment decisions on that basis.
Spread betting is a low-barrier-to-entry way of dealing in the financial markets, and you can get started with little capital, tools or experience provided you have a sound grasp of the basic fundamentals. One of the most underestimated yet crucial of these fundamentals is knowledge, and the ability to research positions thoroughly before investing. It is this process of knowledge and research than differentiates successful traders from the field, and makes spread betting a trading vehicle with real potential.