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The Long and Short of Financial Spread Betting

 


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Financial spread betting must be given due consideration by those engaged in the trading of stocks, forex, indices and commodities. The most promising advantage of spread betting is that there are zero brokerage fees charged on the deal. Bookies realize their profits through commissions on the basis of the quoted spread.

A good way to illustrate how the transaction works is through an example, as the concept is generally the same in all markets. Let us assume that there are strong indications that current value of FTSE 100 index of about 6230 is too high, and chances are that share prices will decline in the next month or so. Subsequently, a spread bet may be quoted against the FTSE 100 price which would fall back between the spread 6165 to 6175 by the 3rd week of the next month.

Based on this existing spread, you have two options, either you bet that it will fall below this price range and sell the index or you bet that it goes higher than this and buy the index. Either of these options, you are making a bet by staking a sum of money, say £12 per point. You should sell the index if you think the price will fall. Suppose that within the time frame, the FTSE 100 drops 150 points under the spread index to 6015. Based on this result, your total spread or profit will be £12 times 150 or £1,800. The investment instrument gives you the flexibility to exact your earnings as soon as you close the betting position.

Nevertheless, be aware of the pitfalls in spread betting. The prospect of windfall profits is balanced by an equal prospect of potential losses. Suppose that you were betting on the bidding side of the spread under similar conditions as mentioned above. The losses to your account would be tremendous. This negative hit on your pocket will be equivalent to £12 times 160 or £1,920. Remember that the potential of making a loss is tremendous and a bit greater than the potential for making profits. On the other hand, if you make the right call, the profit will likely be astronomical.

Due to the speculative nature of this market and the insecurities involved, spread betting companies and providers enforce hard and fast rules regarding credit. In most cases, they only provide credit to individuals who are capable of absorbing substantial losses in the transaction. Therefore all spread betting positions are automatically closed before accounts run into negative balance, and to keep your positions open you need to make cash deposits into your accounts with bookies.

So, what are the things that we should consider if we want to give this a shot? You have to remember that, just like with any other trading method, financial spread betting bears upon us the same risk. It is wise that you look for spreadbetting companies that provide a special facility for a demo account that comes with imaginary margins. This will allow you to “test drive” the trading method without the attendant risk of losing large sums of money due to erroneous calls.

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