Financial spread betting provides the ordinary investor a tax efficient opportunity to speculate on fluctuations in the prices of thousands of global market instruments. These include individual shares, equity indices, foreign exchange, commodities, interest rates and bullion.
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It offers four key advantages over other more traditional investment methods;
Within the UK and a few other countries spread betting is totally exempt from tax (no capital gains or income taxes and no stamp duty) so any profits you make from trading are yours in full.
You can choose which way you think the market will go so you aren’t restricted to just buying and waiting for the price to rise. You can buy or sell (go long or short) giving you more flexibility in your decision making and ultimately giving you greater opportunities to profit from a price movement within the market.
Margin trading gives you the opportunity to leverage your trade, meaning a significantly reduced initial deposit than would be traditionally required to obtain a similar exposure to the markets.
You can trade on international markets without having to worry about converting any profits back in to your home currency. Each transaction produces a profit or loss in a single currency nominated, in advance, by you.
Financial Spread Betting uses the same fundamental trading techniques that are used when trading most traditional assets.
The major difference is that you do not physically take ownership of the underlying asset, you simply ‘bet’ on the direction of the price movement instead.
When placing a spread bet, an investor is asked to define three basic things –
The instrument/market and type of bet
The direction they believe the market will move
The stake, i.e. the amount they would like to make for every point that the market moves in that direction
Most companies offer real-time prices in thousands of markets, which of those you trade is solely your decision. For example, you may wish to take a short term view on an index or have a longer-term view on a share or commodity, you can even do both at the same time. The platforms brokers offer have real-time charts with built-in indicators and analysis to help you decide.
The only other thing you need to consider when choosing an instrument is the type of bet that you wish to place on that market. The top spred betting companies offer a range of bet options that are available to suit the desired duration of your trade. These range from only a few minutes, to a single day, to 3 months in length, and even one where there is no defined end date.
Daily Cash Bets- designed for the short term trader and are settled at the end of the day.
Daily Rolling Cash Bets- these bets do not expire at the end of the day and are automatically ‘rolled over’ to the next trading day (subject to overnight financing charges)
Daily Rolling Future Bets- these bets do not expire at the end of the day and are automatically ‘rolled over’ to the next trading day (subject to overnight financing rolling charges)
Quarterly Bets- expire on a set date three months in the future and do not incur financing (or rolling) costs – it is all built into the price, up front.
It is important to note that a bet can be closed at any time before the bet’s initial expiration date.
If the investor believes the value of an asset is set to rise in the future they would place a ‘buy’ (or ‘up’) bet, this is known, in market terminology, as ‘going long’. Conversely if they feel that the asset price is likely to fall in value, they would enter a ‘Sell’ (or ‘down’) bet, otherwise known as ‘going short’.
Going Short (or “shorting”) is a major advantage compared with traditional trading. It describes the practice of selling a borrowed asset with the intention of buying it back later at a cheaper rate than at which they initially sold. The short seller is looking for the price of the asset to fall before buying it back at a cheaper price. This concept opens up the possibility of making profit when the price of an asset is falling in value.
When placing your bet you will be asked the stake/amount you would like for the bet. For every point that the asset moves in the correct direction the investor will profit by the stake amount. So as an example, if you had placed a buy bet at £1 per point and the asset value rose by 10 points the bet would be worth £10. It really is that simple. Obviously, if the market moves in the other direction, then those profits turn into losses.
The stake amount is an indication of the level of risk you are prepared to take on that trade. The larger the value of the stake amount, the greater the potential reward, however, there is clearly also the potential for larger losses.
Find it all too complicated? You might find social trading a good alternative.