The most natural starting point for an analysis of the practical side of spread betting is spread betting on shares. Share dealing is a great basis for comparison, because it represents trading in its purest and most unadulterated form – even those with no insight or knowledge in trading and the financial markets can grasp the concept of how share dealing works. A trader buys shares, representative of a percentage of ownership in a company, in the hope that the company will perform beyond expectations and increase its value. The profit portion arises when the difference in a share’s value rises over the period of ownership, with traders ideally looking to buy low and sell high to maximise their returns, with an ongoing yield arising from regular dividend payments (i.e. a proportionate share of company profits).
In spread betting terms, the trading of shares represents one of the largest areas in which traders can engage, betting on spreads based on a share’s market value usually over the period of one trading day. The broker will quote spreads based loosely on the current market value and perceptions of future performance, leaving the trader to do his own research legwork into identifying whether a market is under or overpriced. In the same way as with trading shares directly, price and market data can still be analysed to give credible indications of future performance, although these then have to be adjusted to take into account the spread range on offer, in order to determine whether a particular trading opportunity is viable.
Why Spread Bet on Stocks (Equities)
When it comes down to it, spread betting and share dealing are fundamentally different transactions, both legally and practically. While in essence the basis of the trade remains the same (i.e. the underlying company’s shares), the two different trading styles lends themselves more readily to different trading circumstances. Spread betting is foremostly a leveraged trading mechanism, as we’ve already discussed at length, making it a much more profitable/risky proposition for traders. Minor movements can quickly equate to major movements in your account balance, so the extent to which the market moves in a day becomes critical to the trading effort. As a result, spread betting tends to be used as a very short-term trading style, building in leveraged gains on small market movements to yield quick profits. Incidentally, this fast pace is what has helped propel spread betting into the forefront of mainstream retail investment spheres – whereas before, transactions may have taken years to mature, spread betting allows both the trader and the broker to deliver quick, snappy profits in a fraction of the time.
Spread betting also compares favourably in terms of its flexibility, with traders capable of buying and selling a share market with equal swift. That makes spread betting more amenable to a number of different trading circumstances, and allows traders to take a more pragmatic approach in the round towards identifying profit opportunities when they arise on either side of the coin. Rather than picking long-term prospects, traders can swoop in to nick not insubstantial profits from moving markets – regardless of their direction or ferocity of movement.
How To Spread Bet On Stocks
That then leads to a few practical conclusions about how best to trade shares through financial spread betting. Firstly, think short-term as far your research is concerned. Look to find companies that are on the move today, and work out where they’re likely to end up by the end of the trading cycle. Ask yourself, “what will happen to this share price today”, rather than taking too much care over the fundamentals. A fundamentally bad company, built on shaky foundations can still have a good day, and for the purposes of your spread betting that’s exactly what you’re looking for. You won’t acquire any asset (and therefore any right or interest in the company), so the optimum strategy is to look for ultra short-term movements in the markets in order to best capitalise on your leverage.
Look for the low hanging fruit that exists in the share markets, and make sure you know your onions when it comes to what’s happening in current affairs and the global economy – and in particular as to how these will relate to performance in your chosen market today. Remember that if the FTSE does badly, chances are individual shares (and especially those in particularly relevant sectors) will do just the same. If you know what’s lurking around the corner, you will be best placed to make judgements on the directions of the markets.
Don’t be afraid to sell down poor performers – for traditional investors, this might take some getting used to, but it’s equally possible to profit from a bad day’s business in a sector as it is in reverse. By embracing the flexibility of spread betting and attacking real, short term, leveraged opportunities as they arise, you can strengthen your chances of profiting from the share spread markets in which you choose to trade.