Spread betting involves speculating on the financial markets, and betting on changes in the spread of these stocks or shares. To begin spread betting you’ll need to sign up to a spread betting platform and open an account.
Unlike other types of financial trading, which involves the use of instruments and holding of stock, spread betting is much easier and only involves betting on the market fluctuations of stock. As such, it is much easier to do, contains zero capital gains tax (giving you more profit), and you can place stop-loss orders and make far more money correctly predicting changes in the market than ordinary fixed-odds betting. Spread betting is advantageous in that you can start betting from as little as £1 per point. You don’t require a big capital stash to start spread betting on the FTSE, and because you are trading on margins as opposed to outright stock you don’t have to pay for the full cost of your position exposure. You have more leverage too.
Most financial platforms also allow you to spread bet across other markets such as the FTSE, NYSE and DowJones. You can even spread bet in other markets, such as equities, commodities, currencies (FOREX), indices, or trading in the price of coffee and gold.
All spread betting companies are regulated by the FCA. If you are over the age of 18 and a UK resident then you will be allowed to open an account with any of the spread betting platforms available on the market.
There are big risks involved in spread betting. You need to think carefully before you open an account and start trading. I think around 90% of spread bettors are male, with an income above £50k and have experience working in the city or a solid knowledge of stock markets. To be a successful trader and spread bettor, you need to have discipline and risk tolerance. Although spread betting can be very profitable in comparison to regular financial trading and purchasing stocks the conventional way, the risks are still there, and it is easily possible to make big losses with a small starting capital. The risks are big because on average, 6 out of 10 spread bets will lose money (although this could be profitable in the long run, if you make more profit on the 4 bets than losses in the 6 bets).
It is vital that you use spread betting bankroll management to prevent your risk exposure. Most experienced spread bettors from forums such as Trade2win.com suggest risking a maximum of 1% of your bankroll for each bet. So for example, let’s say you have a stop-loss order of 10pts. That means if your total bankroll is £1,000, you only want to risk £10, which means you should wager a maximum of £1 per point.
Time management is also important for succeeding in spread betting. Whether you are shorting stock or wagering on multiple positions, you need to be very organized and planning in where you money is, and well to sell the offer price.
Risks of Spread Betting
Remember that it is conceivable for you to lose more than your initial deposit on a single bad trade. However this is OK, in fact most spread traders lose money on 50% of their day trades by spread betting on the FTSE. The important thing is that you make more money on the trades that you do get right than the ones that do badly. This will lead to a high monetary sum giving yourself profits.
By reading some of our spread betting articles you’ll be able to learn more about spread betting and the different types of orders that you can place, along with reducing your financial risk exposure. For example, you can learn what percentage of your starting capital to wager on each bet along with how to prevent big losses with stop-loss and stop-limit execution orders.
Spread Betting Example:
I believe that Microsoft’s share price will shoot up in the next few hours. I check online and see that Microsoft’s current share price is 150. I decide to wager £10 per point movement and the platform I’m using gives me a bid (buy) price of 151. 5 hours later, Microsoft’s share price rises to 160 and I close my account for £100 profit.
In general, this is as easy as spread betting gets. The above example is called a long bet and involves wagering that the price of a specific index/stock will rise, meaning that I look for the lowest bid price and buy as much as possible. Usually the minimum amount you can wager is £1 per point.
History of Financial Spread Betting
Spread betting originated in 1974 when the IG Index was founded by Stuart Wheeler. The IG Index allow investors to “bet” on the price movement of gold without the expense of buying bullion or other controls. Most spread bets back in that time were based on the performances of the Financial Times index, Dow and other financial barometers. The purpose was to hedge investment positions (reducing risk and exposure) and this was found to be extremely popular by those in the financial community and every day traders.
While City Index were also founded in 1983, the majority of financial companies launched during the dotcom boom on the 21st century.
Nowadays, there are now more than 12 spread betting platforms and trading companies in the UK, each providing access to a range of commodity markets and Forex.
Growth of Spread Betting
Spread betting became more popular as the advantages of it started to become obvious. Tax-free profits, a lack of capital gains tax and the improvement in mobile/internet technology have made spread betting on financial markets easier. Traders can now spread bet across a ton of markets, house price, index and financial markets across the world from a single spread betting platform or account.