This spread betting news article aims to give you a complete understanding of spread betting from a beginners perspective.
Spread betting is a form of trading that allows you to predict the price movement of certain assets, such as a currency pair, if you correctly predict the rise or fall in price within a certain time frame you profit depending on the rates offered.
Spread betting is similar to fixed odds betting, however your profit or loss is determined by how much the market moves, rather than a black and white win/lose. This allows for higher potential profits but also loses depending on the accuracy of your prediction.
What is the spread?
The spread is the two prices for an asset, the buy price or offer price, and the sell price or bid price, this means you will always be buying slightly over market price and selling slightly below. Depending on the market the spread can be higher or lower, for example one market may have a spread of 1 meaning the difference between the buy and sell price will be 1.
Spread betting example – shares
In this example Microsoft is trading with a sell price of 70.00 and a buy price of 70.15. You predict that Microsoft shares will rise due to an upcoming Microsoft conference displaying information on new products, so you buy Microsoft shares for £10 per point of movement.
After the Microsoft conference you are proven right, the share prices have increased to 70.50 for sell and 70.65 for buy, you close your trade here and thus profit £350.
( Current sell price minus original buy price x 10 )
( 7050 – 7015 = 35 x 10 = £350 )
If you had instead decided to sell Microsoft shares at £10 per point at 70.00 then closed the trade at 70.65 you would have lost £650
( Current buy price minus original sell price x 10 )
( 7065 – 7000 = 65 x 10 = £650 )
As you can see from these two examples, there is a large potential for both profit and loss depending on how well you can predict the movement of the markets, as well as how long you feel comfortable sticking with the trade, or potentially how quickly you can close the trade if things go wrong.
Benefits of Spread Betting
Fast paced trading. Opening a spread bet happens almost instantly as does closing the trade, this allows you pinpoint accuracy for opening/closing trades at your desired price point.
It is tax free (UK Residents) Spread betting is free from taxation in the UK, please check for yourself however to ensure this information has not changed with time.
24 Hour markets Many markets which allow spread betting also offer it 24 hours a day allowing you to trade whenever you have the time.
No commission The spread itself eliminates the need for a commission charge allowing for potential greater profits.
Good range of asset classes Spread betting is accepted on a range of asset classes such as: Forex, treasuries, commodities, indices, shares, interest rates and more, although how many are accepted depends on the broker you choose.
Spread betting is leveraged This means you only need to put up a certain percentage of the value of your bet in order to open the trade, however this can also lead to higher loses if you predict the market movements incorrectly.
Ability to short the market Shorting the market means placing a bet that a price will fail, being able to capitalise on rises and falls makes spread betting more flexible than others methods.
Key Aspect of Spread Betting
Although this spread betting news article is only meant to inform you about spread betting I will quickly cover the key aspect of spread betting. This is remaining on-top of current news and affairs, prices can change within minutes of certain news being revealed, in our example above the Microsoft conference revealing a new product resulted in a sharp increase in price allowing for big profits. Ability to predict how the market will react to certain news is the number one key to successful spread betting.
Choosing a broker
There are many different brokers to choose from to facilitate your spread betting, I personally use CMC Markets as it fits my needs, however the positives and negatives of this broker may not suit your needs and this spread betting news article is meant to serve as a guide to spread betting, rather than a review of potential brokers.
It is important to research brokers yourself in order to find the best one for you.