How to start spread betting
Have you ever wondered what is spread betting?
Spread betting allows you to speculate on the price movements of a huge range of financial assets and instruments. Spread betting also provides the flexibility to take a position whether the market falls or rises. And unlike traditional share trading you need relatively little initial capital to get started. Here you can learn how to get started with spread betting.
What Is The Spread?
All spread bets are quoted with two prices. There is the buy price, which is the price you choose if you think that the market is going to increase. And there is this is the sell price, which is the price you can short if you think the market is going to fall. The difference between these two prices is called the spread.
Spread Betting Allows You To Use Margin
One of the key concepts with spread betting is that it allows you to trade on margin. This means that you only have to put up a small percentage of the entire value of your position. The margin required with spread betting is typically between 1% and 10% of the entire value of the position.
How Spread Betting Differs From Traditional Trading
Spread betting differs from traditional trading in a number of key aspects. Firstly, there are no commissions on a spread bet. Instead the spread betting firm makes their income from the spread, which is the difference between the buy and the sell price. Secondly, spread bets are a derivative financial product. This means that you are speculating on the move of an underlying asset rather than the asset itself.
Examples of such underlying assets are currencies, shares and commodities. Thirdly, unlike trading shears or indices you can speculate on both movements up in price and movements down in price.
An Example Of A Spread Bet
To help you understand exactly how spread betting works we can use a specific example from the financial news.
Recently Deutsche Bank shares lost 5.4% falling to €37.21 after the bank reported a pre-tax loss of €1.15 billion. This result was particularly disappointing considering that analysts were expecting a €628 million profit.
Now imagine you wanted to make a spread bet based on that situation. Before the announcement of the loss a spread betting firm might be offering a spread of 39.03 - 39.12. You can bet on whether Deutsche Bank will end up above 39.12 or below 39.03. In this case if you correctly predicted that the shares were going to fall then you would have made a profit. How much will depend on your initial stake size.
How To Manage Risk With Spread Betting
Because spread betting allows you to leverage your trades it can be very lucrative. But, leverage also increases the risk of your trades– and the potential for substantial losses. This is why it is important to manage your risk. Luckily spread betting has a number of different risk management tools that you can use to limit your losses. These include stop loss orders and guaranteed stop loss orders.
As Larry Hite noted in the famous trading book ‘Market Wizards’ about risk, ‘Throughout my financial career, I have continually witnessed examples of other people that I have known being ruined by a failure to respect risk. If you don’t take a hard look at risk, it will take you.’