Tired of traditional trading on the stock or commodity market? Welcome to the world of spread betting. While having the same risk as with the stocks, it’s tax-free and offers the opportunity to take profit whether the market is in green or red.
It covers a wide range of alternatives to bet on; Indices, individual shares, commodities and currency rates.
So, what is the Bet? Unlike traditional share trading, you never own the actual share or commodity. You only make a call on whether you think it will go up or down in value. You stake a certain amount of money per point movement; the more it moves in your favour the more money you make, the more it moves against your prediction, the more you lose.
What is the Spread? The concept is same like a stock future. The spread is the difference between buying ans selling price. You will buy at the higher price if you think the market will rise (Going Long), or sell at the lower price if you think the market will fall (Going Short). The tighter the spread, the smaller the market has to move for you to make a profit.
Now that your concept is clear, US readers you might want to skip the rest of the article as SPREAD BETTING IS LEGALLY NOT ALLOWED IN USA. Spread betting can be done in the UK, few other European markets and Australia only at this time. They are operated by brokers, known as spread betting companies.
What can you Spread Bet on?
Pretty much everything that can be individually traded is in the scope of spread betting.
Stock market indices – This is the most commonly traded aspect in spread betting. You can spread bet on almost all major international markets
Individual Stocks – Shares in individual companies from any market in the world
Commodities – Almost all commonly traded commodities, metals, fodder and agricultural producers.
Currencies – Foreign Exchange, USD, EUR, GBP, AUD etc.
Interest rates and Bonds – Short term or long term interest rates, Government Bonds or gilts.
How does a Spread Bet work?
First, you select your target, whether it’s a stock index or an individual stock you want to bet on.
Let’s take a Dow for example
Start by checking the price quoted by the spread betting company. It will be the actual index share price. There will be always be two prices, a buying price and a selling price; example 11900 – 12050
As the first step, you must decide if you expect DOW to go up higher than the buy price, or go down lower than the selling price. If you think it will go up, you buy DOW at the buy price, if you think DOW to go down, you will sell DOW at the selling price.
As the second step, you must decide how much you are betting, that is the amount of money you gain or lose per point of movement on the value of the index. It is always expressed in currency per point of movement e.g. £10 per point.
If you buy DOW at 11900 and it moves up by 100 points and at that point you decide to sell, you made a profit of 100 (points) * 10 (per point) = £1000. You may lose a huge amount of money if luck is not in your side.
If you sell to open your trade, you sell at the lower price, and when you close the trade, you must close at the higher price quoted at the time. You can close a trade at any time whether you are making a profit or a loss. You do not have to meet any specific value on any specific date.
You can put stop loss the same way you do with your losing stocks to cut down your losses.
Spread betting companies require a security deposit to cover potential losses, known as margin requirement.
Benefits of Spread betting
- The biggest benefit of spread betting is the tax advantage as in the UK and few other markets spread betting is considered a form of betting and is exempt from capital gains tax. So, the profit is all yours to take.
- Spread betting trades are commission and fee free
- It provides another avenue of investment for the ultra rich.
Risk of Spread Betting
As per Wikipedia, A research showed that historically 1 out of 5 bets ends up as winning bets, rendering the spread betting brokers as the real money makers. But, then again the same research also says that this is the success rate in the traditional mode of stock trading. In my personal opinion, this avenue is for ultra rich and people with disposable income. Not for the people like I am. And I won’t recommend you going for this if you are on a tight budget and saving for a goal in mind.
A very interesting outcome that was, readers, what is your take in spread betting?