How Does Financial Spread Betting Work?

Spread betting is not very different from other forms of trading, in fact, it is often referred to as ‘spread trading.’ In the UK, it is more commonly referred to as ‘betting,’ because you if you ‘buy’ a particular instrument, for example US Crude, you are not actually taking delivery of physical oil. You are, in effect, only betting on whether the price will go up or down. Your profit or loss will be directly related to the amount by which it increases or decreases. Spread betting is also a leveraged investment product. What this means is that to trade in £10,000 worth of a particular product you do not need to physically put down £10,000. At a leverage ratio of 100:1, all you would actually need is £100. With that, you could buy yourself exposure to the full value of whatever you wanted to trade in. Leverage creates both opportunities and dangers.

A leveraged investment only needs to go against you by a small percentage to cause you to lose your initial deposit for that particular bet or trade. To take the example of the £10,000 investment mentioned previously, with a 100:1 leverage you would lose everything if the price of the product dropped by only 1%. The reverse is also true, of course; if the price were to go up by 1% you would double your initial investment. Financial spread betting is a leveraged form of investment, it carries a high level of risk to your capital and losses can exceed your stake. Please ensure that it matches your investment requirements as it may not be appropriate for all investors. Make sure that you fully appreciate the risks involved. You should only spread bet with capital that you can afford to lose.

Seek independent advice where appropriate.

To limit your risk, the vast majority of the so-called market makers or spread betting companies allow you to make use of the stop loss. If you do not want to risk more than £75, for example, you would set the stop loss level at £75. If so, your trade would automatically expire at the point that your losses hit £75, although note that not all stops losses are guaranteed. Most spread betting websites also allow you to set a ‘take profit’ or ‘limit order’ level. This means the trade or bet is automatically closed when the price reaches that point. This feature enables you to lock in your profit before the price has the chance to fall once more. However, if it were to continue to rise, you would obviously not benefit from any further price increases. You can enter into spread betting contracts on a variety of products, including commodities, currencies and equities.

Some are more highly leveraged that others; currencies are, for example, usually more highly leveraged than equities. Spread betting is often seen as more suitable for short term trading than long term ‘investment.’ Many day traders use this form of trading/betting because it is convenient to work with and there are no commissions or transaction fees, other than the difference between the offer price and the bid price. Having said that, if you are using ‘rolling daily’ trades then there is a small fee if you roll your position over to the next trading day. Many spread betting companies offer a comprehensive range of products to help their clients make informed decisions. They range from live prices to technical analysis software and charting packages, and even newsletters covering fundamental factors influencing the price of particular products.

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