What Is Financial Spread Betting?
Spread betting involves speculating on the direction of a financial asset. That asset could be a share, commodity, index or option. With spread betting you do not actually purchase the financial asset you are speculating on. The spread bet is a derivative of the underlying asset.
If you correctly predict the movement of the underlying asset then you can profit, similarly, if you are incorrect then you will make a loss. Financial spread bets allow you the opportunity to make a profit– or loss– on both up and down movements.
Spread betting takes its name from the fact that you are quoted two different prices for any given spread bet. These are the price at which you can buy and the price at which you can sell. The difference between the two is known as the spread.
How Does Spread Betting Differ From Traditional Trading?
One difference between spread betting and stock market trading is the absence of commissions. When buying or selling shares online or options listed on the stock market through a broker you are charged a commission. This may either be a flat rate or a percentage of the total purchase or sale price. This commission is how a stockbroker earns their income. In contrast, with spread betting the company mainly earns their profit from the spread– the difference between the buy and the sell price.
Advantages Of Spread Betting
- No commissions – As mentioned above one of the key advantage of spread betting is the fact that there are no commissions. This is particularly advantageous for frequent traders.
- Low deposit requirements – Many spread betting firms will allow you to make trades with as little as a 5% deposit. So for example, with £5000 on deposit with a spread betting firm you could have the equivalent exposure of £100,000. Do not forget that losses are also subject to leverage– and can similarly exceed your initial deposit.
- Wide range of trading tools – Spread betting companies offer a wide range of trading tools which can be used to help reduce your risk. This includes being able to place guaranteed stop orders which close a trade at a specified price no matter what the underlying market conditions are.
- Access to a many different types of assets – From a single spread betting account you can have the ability to speculate on a wide range of financial assets. This includes commodities, options, indices, currencies, shares and bonds.
- Tax advantages are available – Spread betting can have tax advantages depending on where you are located. In the UK there is no stamp duty or capital gains tax on any profits that are made.
- Profit from falling markets – Unlike purchasing shares or an index fund you can profit from both a falling and a rising market with spread betting. While your profits are essentially limitless, so too are your losses. The more the financial asset moves in the direction that you have predicted the greater your profit– or if it moves against you, the greater your loss.
The Importance Of Keeping Up-To-Date With Key Financial Indicators
To augment your spread betting training it is critical that you keep up-to-date with changing conditions in the market. There are economic calendar events that financial spread bettors need to be aware of and keep track of. Not only must the spread bettor know what announcements are important, but also what impact these will have. Announcements from the world’s largest economy – the US – such as average weekly jobless claims, building permits and manufacturer’s orders are all leading indicators which may signal the future direction of financial markets.
In Ari Kiev’s book ‘Trading To Win’ he highlights the critical importance of having access to the latest information: ‘To be a super-trader, you’ll need an edge to overcome the laws of probability and the uncertainty of the marketplace. That edge comes from information flow, the ability to correct your habits in terms of the market’s characteristics.’
The spread bettor should also make use of spread betting training resources and educational material. There is a wealth of free resources available on the internet that the spread bettor can use to become educated in how to profit from these financial instruments. As with many endeavours, failing to prepare with spread betting, is simply preparing to fail.