What is Spread Betting?
Financial spread betting, as the name implies, is a form of betting. It started in the UK and was introduced to the world as a speculative way of changing gold prices in the 1970s.
Notwithstanding, it’s more than a betting game; it is a tax-free method of trading. Through a spread betting platform or spread betting brokers like Pepperstone UK, investors get to make their forecast concerning a global market known, then trade to that effect.
In spread betting, you get to speculate on the upward or downward trend of stocks, shares, assets, etc. without having to go through the stress associated with the traditional trading system. Spread betting allows you to receive higher returns on your trading investments. It is highly flexible, giving you access to diverse markets with just one account.
Unlike the traditional share trading, spread betting investors don’t need to pay any tax, broker’s fee, or commission. The only fee charged in spreading is already added to the quoted price you are speculating on.
The Origin of Spread Betting
Spread betting started via the idea of a young stockbroker named Stuart Wheeler in 1974. Wheeler introduced the concept of speculating on the price movement of gold as an index (even without having the gold physically).
This birthed the company called Investors’ Gold Index. Due to the objection of the Bank of England to the previous name, the name remained so until it had to be changed to IG Index. Before long, IG Index spread its service tentacles to include foreign exchange and significant commodities.
The popularity of the trading system made it a new yet profitable market. This encouraged the springing up of other similar companies. By the late 1980s, the spread betting market had found its footing.
What is “Spread”?
The spread refers to the speculation options: “sell” (Bid) or “Buy” (Offer). A spread is made around a market price (e.g., the actual price of gold or another financial product). You get to make a forecast and bet on whether the market price of the asset chosen will rise or fall.
This means that you make a profit if you predict the movement correctly. If the market doesn’t move as you speculated, you lose money.
What is “Stake”?
The amount of money you wish to bet is known as the “stake.” The amount betted is based on the “per point” movement of the financial product’s price. The size of a ‘point’ varies depending on the asset being betted on. There’s no limit to the minimum or maximum amount to be staked.
Spread Betting Markets
The spread betting platform has various markets, and the investors aren’t restricted to any of the markets. An investor could decide to speculate on the forex market, CFD trading – click here to read more about spread betting vs CFD trading – the stock market, or even financial commodities, such as gold, silver, crude oil, Google company shares, etc.
Spread Betting System
When you bet, you can keep the end date open or set a time limit. The time limit could be within a day or even up to three months; the end period is the close of the trade. Every time the points move in your favor, you win multiples of your stake.
Similarly, every time the points move against your prediction, you lose multiples of your stake. This means that, depending on the market trend, the longer it takes you to close your trade could either work for or against you.
Your profit or loss is the difference in the amount you opened trade with and the amount you accumulated at the close of your trade. As long as the money accumulated by the end of the trade is more than what you started with, you made a profit. If the reverse is the case, then your trade was not profitable. This is why you need to trade with minimal amounts.
If you notice that you’re on the losing end, you can place a stop on your trade. This is a double-edged sword, though. This is on two accounts.
Firstly, if you place a stop on your trade before the due date, you are selling yourself short and can only get a minimal amount back out of the amount you used in initiating the trade. Secondly, you could end trade only for the trends to start moving in your favor. By then, your stop trade would be irreversible, and you again short-changed yourself.
Styles of Spread Betting
- Future: Also called the long term-bet, this trade is usually opened at the beginning of a quarter and closed at the end of a quarter. The stakes in this method are typically placed on the point movement of a financial product for a year’s quarter.
The spread trading companies’ trade closure usually comes about during the same period as the Stock Exchange trading quarters. Generally, this trading style is the riskiest and also the most profitable.
- Daily: This trading style is the most common and also the most straightforward. Daily spread bets are usually placed at the start of the day and closed at the end of the day. They could also be opened and closed at any time within the day.
- Rolling basis: This style is also quite straightforward. This trading style usually rolls into the next day or even days, instead of being closed at the end of the day. This is great if you want to trade for more than a day, but shorter than the quarterly three months.
How To Get Started on Spread Betting
1. Spread Betting Demo Account
Start by registering for a spread betting demo account. The demo account is your guide to learning how to trade. Use this to practice and understand the diverse markets.
The demo account is highly effective because you get to understand the workings of the account without losing money. Only after you’ve understood the operations of the demo account should you set up a real account.
2. Set Up a Real Account
The first step towards becoming a spread betting trader is setting up a real account. Research the best spread betting company and platform that suits your needs. There are diverse varieties of spread betting platforms.
The most major ones are as follows: Web-based trading platform, downloadable trading platform, and mobile app trading platform. After making your pick based on its suitability, set up an account with the platform’s company. It’s imperative to understand your chosen trading platform. Without fully understanding this, losing is inevitable.
You may want to stake several spread bets at a time. Remember not to stake a bet with more than a minimal portion of your capital. Also, keep in mind that there are times when you would win, and there are times when you would lose.
Benefits of Spread Betting
- Option to Speculate Up or Down: You get to determine if you want to speculate the product going up or down, hence you aren’t restricted to betting just up.
- No Limit to Trading Amount: Spread betting allows you to trade with low amounts when compared with what investors in the real market put down. Also, spread betting is a margined trade, so you only need to deposit a small percentage of your capital to trade.
This method helps protect you even if you lose any trade. This means that even if you lose a particular trade, your major capital is still intact.
- Less Time-consuming: After understanding the trade workings of the spread betting platform, it’s less time-consuming to navigate through. You can keep doing this while still holding on to your full-time job.
- No Commission/Tax/Broker’s Fee: With spread betting, you get to initiate the trade process all by yourself without needing to pay the broker’s fee to a middle man. Also, spread betting is tax-free.
Asides this, no commission is removed from your profit. The only amount that the platform benefits from is a meager amount, which is added to the spread on the quoted price that you stake on.
- Access to Financial Market: Spread betting allows you to speculate and make money from diverse financial markets that you otherwise wouldn’t have had access to.
- Market Flexibility: You get access to various markets with that one account you have. You could decide to bet on the stock market, on shares, commodities, etc. all with one account.
- One Account – One Currency: With spread trading, you do not have to worry about expensive exchange rates since you can trade in either Pounds, Euros, or Dollars.
Additional Spread Betting Tips
- Use a free Demo account to get the hang of the trading system first.
- Familiarize yourself with the risks involved in the spread betting platform before you start trading.
- You can also consider seeking the expertise of a spread betting specialist before you start trading with substantial money.
- You could also take online courses, read books, listen to talks, and watch videos about the spread betting platforms as well as how to make money through them.
- React quickly yet efficiently to changing market patterns.
- Trade responsibly with just a minimal amount.
How to Reduce Your Risk
Naturally, spread betting, just like other similar trades, is highly risky. The reason is that the prices quoted move rapidly, reflecting actual market conditions; this could be for or against you.
The complicated system means that you need to understand how the system works. Without understanding this, you’re like a student who went for an exam intentionally prepared to fail.
Here are some strategies that help reduce risk in spread betting:
- Stop Loss Order: One good strategy for reducing your risk is the use of trading order accounts. This reduces loss by automatically adding a Stop Loss order to your trade to help reduce the risk of money loss. It could also recommend that you manually add a Stop Loss order to your trade. This does not guarantee a loss-free trade, though.
- Structuring Entry and Exit: Structuring trades to fit with the price movement pattern of your financial product is an effective way of reducing your risk. You need to understand the highest possibility at stake for your entry and exit plans.
To understand the price movement pattern, you should follow the news of your financial market to know the general market index.
- News-based Strategies: Following the news allows you to know economic changes that could affect the price movement of your underlying asset. A drastic change in the known commercial pattern could help you realize that prices are bound to nose-dive. This would give you a winning possibility.
- Market Experience: This comes after you have known your way around well. Due to the experience, you must have accumulated trading on the platform; you would come about new personal strategies that would help boost your wins. With this, you would know the right kinds of assets to bet on at each specific time.
Do well to review your losses. Analyze the wrong moves you made and learn from it. This builds your market experience, helping you to carve your own winning moves.
- Money Management Strategy: Don’t take excess financial risks at any point, even if you sense a high possibility of you winning. It could be tempting to put in huge money to win big, but this is a highly risky move. If the odds go against you, your money is gone.
- Swing Trading Strategy: This is also known as the positioned trading strategy. This strategy means that the trader looks towards multiple trades in various markets and decides on their winning points. It is called swing strategy because the trader is taking a swing at multiple markets.
After identifying the possible highs and lows, the trader places stake on the price quotes of all the financial products chosen in the various markets. This is a very risky trading strategy as it could result in multiple losses. Notwithstanding, this strategy is very profitable if harnessed correctly.
Understanding the longer-term trend pattern is essential to stay afloat with this strategy. This strategy is not for the faint-hearted neither is it suitable for the jumping jacks. It is suitable for well-experienced traders that can painstakingly analyze the various markets and their trends for positive use.
Just like forex trading and CFDs, spread betting is a high level of risk investment. It’s essential to understand the market system and trading strategies well in order to stay on top of your game. Look beyond your losses, but learn from them to help gain more profit.
Most importantly, trade wisely and responsibly. Don’t trade with large amounts that you can’t bear losing. Finally, prepare for the worst while hoping for the best.