Spread betting is an easy and cost-effective way to trade financial markets. It enables the traders to profit from both rising and falling prices. It is more often viewed as an alternative to traditional trading as it allows gaining exposure to a financial instrument without actually having to own it. To put it simply, it is a bet, in which every point movement in the price multiplied by the size of the stake bet results in either profit or loss. The outcome depends on how correct your predictions are.
The concept is pretty straight forward – you would go long, meaning you would buy a particular instrument, if you think that the trading environment is pointing to rising markets. Conversely, you would go short, i. e. sell, if you think that it is going to fall. If your prediction is correct, you make profits. However, if it is wrong, then you lose.
There are couple of features that are appealing to a spread better:
- It is tax free. Profits in spread betting are not taxed. Also, as you bet on the price movement only, and you neither buy nor sell the underlying market, no stamp duty is paid on the transaction.
- Variety – through one spread betting account you have access to a wide range of global markets. You gain exposure to both domestic and international markets.
- Flexibility in approach. Spread betting allows you to go both long or short, meaning that profits can be attained not only when markets are rising, but also when they are falling.
- Leverage – by using only a portion of the total value of your position you can gain much bigger exposure to the underlying markets with the money you have. Effectively, you can open bigger position or more positions with any given amount of money. This enables you to amplify the yield on your investment. The leverage works both ways, however, meaning that you can lose more than the initial deposit.
- Commissions-free trading – there are no prohibitive commissions associated with spread betting as everything is already included in the spread of the two quoted prices, which makes the whole process more transparent and cost effective.
One should not forget that, as leveraged tool, spread betting is a risky business and that it is possible to lose more than the initial deposit. Therefore it is important to understand all the risks associated with the trading, and implement the accurate trading strategy, along with the appropriate risk assessment, as a gut feeling is probably not the right approach. It is important to be aware of one’s own pain barrier by setting stop loss orders on the positions and above all, to bet with the money that one can afford to lose should this scenario occur.
Anita Paluch, Senior Trader, Gekko Global Markets- dedicated service provider for Spread Betting and CFDs.