Spread betting is a type of derivative trading. This means that the value of the position in the market is based on an underlying financial instrument. Underlying financial instruments can include stocks, commodities and forex.
When you spread bet, you speculate on the price movement of the underlying financial instrument. In other words, you do not actually own it. Your profit/loss is based on the correct or incorrect speculation of the price movement of the underlying market.
Similar to when you trade Contracts for Difference (CFDs), when you spread bet, you bet on the direction in which you think the market will move. It is possible, depending on the exact type of spread bet you are placing, to specify the closing date of the bet or to leave it open-ended.
Spread betting is a type of financial speculation that uses a margin, also known as leverage. Margin means that you can open your spread bet with a deposit that commands a much larger position in the market. The value of your bet in the market, in other words, is leveraged beyond its actual monetary value in terms of your deposit.
Put another way, the price movement of the underlying financial instrument on which you are betting is magnified. For many traders, leverage is one of the key reasons why spread betting is an attractive method of financial speculation. This is because, theoretically, you can make a profit on even small market moves and/or over small time frames.
Nonetheless, it is important to note that any losses are also magnified. Therefore spread betting can result in losses that exceed your initial deposit. Margin can thus be viewed as both an advantage and a risk in spread betting.
Financial spread betting and Contracts for Difference trading both come with a high degree of risk to your trading capital, as such, only trade with funds you can afford to lose.
Ensure that you fully recognise the risk when trading with these investment products. Contracts for Difference and spread betting may not be suited to your trading strategy. Obtain impartial investment guidance where necessary.
There are numerous providers that offer spread betting accounts. The exact terms and conditions, fees, spreads and account specifications can differ widely from one spread betting company to the next. It is, therefore, always advisable to consider what works best for you. Note though that accounts are normally subject to status, terms and conditions.
With spread betting, the ‘fees’ are often included in the spread itself. Different providers will set different spread sizes. If you intend to spread bet on a range of markets, you will want to consider the costs across all of these markets, rather than simply focusing on one. The costs should be clear before you start. If in doubt, you should ask the provider to clarify the costs.
Another idea is to check the availability and/or type of trading platform offered by the provider. Some trading platforms can be relatively simple but others will be more complex to use. Either way most firms let your trade through web-based platforms.