Guide to spread betting: learn how to spread bet profitably.
Guide to spread betting: financial spreadbetting 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.
So what is a financial spread bet?
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 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, he loses to the spread betting company.
Guide to spread betting: betting basics
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.
Guide to spread betting: the spread bet stake
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.
Guide to spread betting: the spread bet trader’s profit
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 (i.e. £5 x 98). You would have lost the same amount if the trade had gone against you and the Footsie 100 index dropped to 6004.
Guide to spread betting: the risks and rewards
From this simple illustration, you can see that spread betting involves a lot of leverage. This means that you are able to place trades that require far more money than your initial deposit with the spread betting broker. 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 (meaning essentially, borrowed money) is a double-edged sword and it cuts both ways!
Nevertheless, if any website can provide you with appropriate education to help you make informed trading decisions, then it is www.spreadbettrader.co.uk
Hope you have found this guide to spread betting useful. Please check out the following articles for further details on this exciting approach to financial trading.