Spread Betting – a Simple Guide

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The world of finance can seem challenging and complex to the uninitiated, but you can still make money without having to spend years studying.

If you are prepared to take the risk, spread betting is an exciting and potentially rapid way to make money. Through spread betting you will have access to a variety of financial instruments and be able to profit from index or price movements in either direction. The big drawback is that in spread betting, losses may exceed your deposits.

By investing through reputable companies like Capital Spreads, you will have access to a variety of markets. You will be able to trade in:

  • Market indices
  • Shares
  • Bonds
  • Currencies
  • Commodities
  • Interest rates
  • Options

Spread betting gets its name from the fact that there are two price quotes for each instrument – a lower sell price and higher buy price. The spread being the difference between the two.

The spread is measured in points, which are called pips. The smaller the spread, the greater the chance of making money. If you assess that the price will rise, you will “go long” and enter your trade at the buy price. If the price moves up, the sell and buy prices will rise.

When the new sell price exceeds your original buy price, you sell (exit your position) and take a profit. If the price falls, however, then you lose money.

A simple example.

You consider that asset XYZ will rise in price. Its sell price is 99 and its buy price is 100 – a spread of 1. You choose to bet £10 a point and therefore buy at 100. If XYZ’s price increases to 102 sell and 103 buy, then you are in profit.

You decide to exit your position and sell at the new price of 102. This gives you a profit of £20 (2 x £10). If the price had fallen to 97 sell and 98 buy and you chose to exit your position to limit your losses, then you would lose £30 (3 x £10).

Of course you have to have money deposited with the spread betting company to make your trades. However, these companies work on a margin that gives you considerable leverage. Say the margin on XYZ was 10%, then you would need (sell price in points) x (£ per point) x 10% as a deposit – this means 100 x 10 x 0.1 = £100.

If your loss exceeds this margin figure then you will either have to deposit more cash (a margin call) or your trade may be closed automatically. Without this margin facility, to make £20 profit you would have had to buy 1000 XYZ shares at a cost of £1,000.

Completing your trades

You can complete your trade within any reasonable time frame. Many people prefer to day trade – that is, to complete the trade in one day. This means that they are immune from sudden market swings that might occur overnight. Also, they do not have to pay the additional brokers fees for keeping a position overnight.

Clearly, the profits and losses from spread betting can be large, but so are the risks. To limit losses, you should always put place a stop loss order on the trade. This means that if the price falls to a pre-determined level (or rises if you have predicted a fall), then it is automatically sold.

Without a stop loss order, you could potentially lose a great deal. Spread betting companies like Capital Spreads advise all beginners to place stop loss orders, at least until they get used to trading.

Despite the risks, there are good profits to be made from spread betting. Also, in the United Kingdom, gains from spread betting are not considered as Capital Gains (at no stage, after all, do you actually own the asset) and spread betting is in fact deemed to be gambling, so there is no tax liability in most cases.

Spread betting is certainly worth considering if you want to make some quick money and can afford the risks.

Full Risk Warning – Spread betting and CFD trading carry a high level of risk to your capital and can result in losses that exceed your initial deposit. They may not be suitable for everyone, so please ensure that you fully understand the risks involved.

Author Bio:

Chris James. I am a freelance finance writer with a particular interest in spread betting and CFD trading.

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