Financial spread betting has grown tremendously in popularity in recent years, and with many new traders looking to enter into these markets, some of the basics much be covered in order to ensure that trades are placed in a proper way so that unnecessary losses are avoided. Here we will look at some of the basics of the spread betting industry.
What is Spread Betting Trading?
Spread betting in the financial markets is one of the most dynamic and potentially profitable ways of speculating on the value of a specific asset. This can be done on an individual basis and from a home computer. But perhaps the biggest advantage of these markets is that all of the companies that offer traders access to these markets must be regulated by governmental bodies, helping to ensure fair trading practices and eliminating unnecessary risks for money that is deposited into spread betting accounts.
How can I make money trading?
Individual traders can make money trading when they correctly forecast the price of an underlying asset (a stock, a stock index, a currency, or a commodity). What many traders do not know is that the direction of these values can be either positive or negative. That is to say gains can be made even during falling markets. With the practice of “short selling” a trader can sell an asset at one price level and then buy the asset back later. In these cases, if price values fall for the asset gains will actually paid into the traders account.
What is Margin Trading?
Margin trading is a practice that allows traders to maximize their potential gains by borrowing funds from your broker in order to increase position sizes. Margin is measured in ratios, which compare the initial capital outlay for a position size to the total position size that is allowed by the broker. For example, is your broker allows you to implement leverage of 100:1, you will be able to open a position valued at $100 for every $1 you initially invest. In other words, you could open a position in gold that is worth $100 and use only $1 of your own money to open the investment.
What are Stop Losses and Profit Targets?
One of the first things traders should be looking to do is limit risk and the spread betting markets has enable traders to use tools in order to limit these potential risks. The two most common tools for this can be seen with the “stop loss” feature and the “profit target” feature, both of which are available on all major broker platforms.
Specifically, a stop loss is a level at which a trade will be closed if prices move in an unfavorable direction. As an example, let’s say that we buy gold at $1500, expecting the value to rise over time. Unfortunately, in some cases, trades will not work out favorably. Let’s assume that prices fall to $1450, which you believe is too far and you want to close your trade. If you had put in place a “stop loss” order at $1450, the trade would have closed automatically and any further losses would have been prevented.
Conversely, profit targets are seen in the opposite scenario. In these cases, a trade will close at a certain price level once it has moved in a favorable direction. Using our example above, let’s say that our $1500 gold trade was correct and prices now trade at $1580, which you believe is a fair price. You could either close the trade manually or you could have put in place a “profit target” at $1580 which would have closed the trade automatically (at a profit). The main point to remember here is that both profit targets and stop losses are meant to limit trading risk.
What are the advantages of Spread Betting?
Luckily, there are many advantages to spread betting. A list of these advantages can be found below:
- There are no official Stamp duties (compare this with the 0.5% that is required for traditional stock investments).
- Non Taxable Profits: Gains that are made from spread betting are not liable to create capital gains tax obligations.
- Avoiding Fees – There are no direct commissions paid to spread betting companies.
- The ability to profit from rising and falling markets.
- The ability to increase gains and trade on margin with small initial capital outlay.
- Access a wide range of capital markets using a single account.
- The ability to limit risks with stop losses and profit targets.
- The ability to enter into small position sizes, with some companies allowing trades as small as $0.01 per point.
Which Markets can be traded?
- Broad stock market indexes, such as the FTSE 100, the NASDAQ, the DAXor the S&P
- Individual corporate shares from the major indexes, such as Apple, Google, GE or Microsoft
- World Currencies (forex pairs) such as the EUR/USD, USD/JPY or the GBP/USD
- Commodity markets with materials such as Gold and Oil
- Interest Rates both seen in long term rates or short term rates.
- Futures markets and binary options trades
- Government Bonds
There are a lot of financial betting sites available online and we must be careful to take into consideration the odds offered by these sites.