So you want to try your hand at playing the financial markets, but you don’t have a worthwhile sum to ‘invest’, and in any case you are already well aware that if you have a lot of money to lose… you probably will. If you want to make big gains from small stakes and – contrary to popular belief – do so at low risk, financial spread betting may be for you.
If you’ve shied away from spread betting because you’ve heard that its ‘risky’, let me see if I can change your mind by telling you how to practice safer spread betting.
Safer Spread Betting
Suppose you fancy taking a punt on HMV shares on the basis that the only way is up from the current (at the time of writing) rock bottom price of about 10p-per-share. To back your hunch in a regular share dealing account, with its £10-or-so ‘dealing fees’ on the purchase and subsequent sale, you would need to ‘invest’ at least £1000 to make it worthwhile. If the company goes bust, you’ve lost £1000!
To back your hunch in a spread betting account you could place a miniscule £1-per- point spread bet such that, if the company goes bust, you’ve lost only £10! Even if you push the boat out on a £100-per-point spread bet, your total risk is no greater than in the traditional ‘investment’ scenario yet you have not paid and ‘dealing fees’ for the privilege. Now tell me how spread betting is more ‘risky’ than traditional investment.
It gets better, because in order to place a £1000-equivalent bet, the spread betting company will not actually ask you to put up the full £1000 since they will offer you ‘margin’. You can stash the difference in your high-interest savings account (but don’t go out and spend it in case the spread betting company claims it when your bet turns sour). If the £1000-worth-of-risk costs you only £200 on 20% margin, and if those HMV shares (for example) double in value, then you’ve made… not a 100% profit, but a massive 900% big gain on your small stake!
I’ve painted a rather rosy picture of spread betting here, and I acknowledge that the doom-mongers are right in their prognostications that you can lose your shirt. And many people do, because they place rash £100-per-point bets on five-digit stock indices thereby putting potentially tens of thousands of their hard-earned pounds on the line at the click of a mouse.
In this article I have tried to show how you can practice safer spread betting by placing smaller bets on lower priced shares, and you’ll be pleased to know that there are other ways to minimize your risks while maximizing your potential gains… Starting with Stop Orders.
About the Author
Tony Loton is a prolific trader and financial writer, and author of the book “Position Trading” published by LOTONtech.