Financial spread betting has developed from being the preserve of the sharp-suited City types to being the derivative of choice for private investors in the UK. The main reason for this dramatic rise in popularity is the fact that it is free from both stamp duty and capital gains tax.
Essentially, a spread bet is a derivative instrument that allows a trader to gain exposure to the movement in a range of financial instruments including individual company shares, equity indices, currencies and even commodities without taking physical ownership of the securities.
Simply put, a spread bet trader bets that the price of a share or index would rise or fall. If the trader is proven correct over time, he wins. On the other hand, if wrong, the trader pays the spread betting company.
Consider the FTSE 100 index trading at 6100. In this case, the 6100 is the mid-price but the broker would quote something like 6098–6102 (a four-point spread). A trader that wishes to bet that the index would fall would begin his trade at 6098 with a short sell instruction. On the flipside, if you think that the index would go up, you simply buy at 6102. Whichever side you take, you are immediately plunged into a loss equivalent to the size of the spread [four points in this case = 6102 minus 6098] and the index has to move through the spread before you start to count any profit. So far so good! This is basically no different from a traditional share transaction.
Since spread betting is structured as a bet, each position is backed by a stake. So rather than buying 100 shares in Barclays, you bet a £1 per point move in Barclays. To understand this, notice that if you own 100 shares in Barclays, then every time the share price rises by 1p you gain £1.
A spread bet trader’s profit (or loss) is calculated as the product of the stake and the total price change. So, in the example above, if you bet £5 per point on the FTSE 100 and it moves from 6102 to 6200, then you would have gained 98 points at £5 per point, which equals £490 profit. You would have lost the same amount if the trade had gone against you and the Footsie was instead trading at 6004.
From this simply illustration, you can see that spread betting employs a lot of leverage. This means that you are able to take positions far in excess of your initial stake. It also means that you can win or lose much more than your initial deposit. Indeed, most spread betting companies only require a deposit of about 10% of the total transaction value.
Make no mistakes about it. Leverage = Risk! The spread bet trader needs to understand this and ensure that spread betting is not seen as a get-rich-quick scheme. Leverage is a double-edged sword and it cuts both ways!
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Spread bet trader is a website presenting analysis, techniques and strategies for profitable financial spread betting.
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Spread Bet Trader: A trader’s guide to financial spread betting
Spread bet trader is a website presenting analysis, techniques and strategies for profitable financial spread betting.
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Spread Bet Trader: A trader’s guide to financial spread betting
Spread bet trader is a website presenting analysis, techniques and strategies for profitable financial spread betting.
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