Financial spread betting is based on a very simple concept: Participants simply bet on whether a specific item’s value will rise or fall. To make spread betting even easier, investors don’t even have to buy the item outright.
Instead, they place the bet by either point or penny movement within a specific market. In this way, participants can build a tremendous amount of financial leverage with only a small investment.
Financial Spread Betting can be used in Almost Any Market
The Foreign Exchange, or Forex, market is the most famous type of spread betting, but this technique can be used to trade almost any financial instrument. At this time, investors can bet on the rise and fall of values in the following markets:
• Foreign Exchange or Forex
• Stock Markets
• Commodities
• Bond Markets
• Interest Rates
• Exchange Traded Funds
• Indices
Analysis is Key in Spread Betting
Financial spread betting is a simple concept, but there is a key skill that must be developed prior to making any trade. Without the ability to spot market trends, success or failure is mostly a matter of luck. A variety of tools have been developed to track the history of each market to point out expected movements based on statistical measurements. Although there are no guarantees in spread betting, this information can reduce risk levels. Of course, there are a variety of spread betting companies that can assist anyone who doesn’t feel comfortable with their analytical abilities.
Benefits of Financial Spread Betting
This trading method has numerous benefits including:
• Provides access to opportunities that traditional markets don’t offer
• Flexibility to trade across a variety of instruments, countries, and markets
• The ability to immediately react to any change in any market
• Affordable entry points for the typical investor
• Valuable tax benefits for UK citizens
• Margin trading allows investors to do more with their available funds
• No expensive commissions
• Trade at any time
• Trade in small or large increments
Margin Trading Explained
One of the most important concepts in spread betting is margin trading. In this model, the investor only deposits about two to 10 per cent of the cost of the trade. The remainder of the value can be left in the investor’s bank account or used for any other purpose, including more trades. This allows investors to take advantage of the entire price movement with a minimal financial outlay. It is important to note that while investors are able to benefit from the entire price movement in a positive scenario, they would also be adversely exposed to it were the market to move in the opposite direction.
An Example of Financial Spread Betting
Based on a trend that indicates the price of ACME stock will rise over the next 24 hours, you decide to bet on this investment instrument. The spread price is 251p – 252p, and you bet £10 per point at the 252 mark. With this move, you have purchased the equivalent of 1,000 shares of ACME stock at 252p each for a total trade consideration of £2,520. To cover this bet, you deposit five per cent of the total trade consideration, or £126, into your margin account
ACME’s stock price doesn’t increase as soon as you expected, so you allow the bet to rollover each day. Finally, ACME’s price exceeds the 251p – 252p range on day five to reach 261p. At this point, you close your bet by selling your shares. Your profit is calculated by subtracting the sell price of 261p from the buy price of 252p to arrive at a 9p profit. Your bet was £10 per penny’s worth of movement. Multiply 9p by £10 to arrive at a preliminary profit of £90. Finally, you deduct any rollover costs, a relatively small expense in most cases, to arrive at your net profit. Of course while profit is the ultimate aim of any investor, it is important to remember the risk associated with this trade, i.e. if ACME’s stock price was to decrease instead of increasing you would lose money according to the same formula.
Financial spread trading is a simple method that can give any investor access to global markets and an unlimited potential for profits. However, every potential participant should take the time to fully understand the risks as well as the benefits.