Spread betting involves speculating on whether the price of an asset will rise or fall in the future. However, it is important to note that traders involved in spread betting do not need to own an asset when they place a bet on where its price is likely to travel. In practice, this is just like betting on the outcome of a football match without having anything to do with participating in the game itself. So, in simpler terms, spread betting involves the betting on spreads. Essentially, the spread is the difference between the buying price of an asset and the selling price of that asset.
According to Ask Traders, spread betting is often associated with high leverage broker comparisons as well as conservative investment strategies. Inherently, spread betting involves investment speculation and trading predictions rather than an actual involvement with the asset in question. Will the price go up? If yes, take the buy position. Will it go down? If yes, take the sell position. Assets traders can buy or sell a broad list of assets, which includes; indices, shares, commodities, forex, bonds, cryptocurrencies, and others. To make money, traders need to establish a position and sell at higher price valuations.
One excellent benefit that is often associated with spread betting is its tax efficiency. The tax from profit from spread betting is non-existent. You don’t pay tax on your profits. Usually, people wouldn’t place a $100 bet on a spread. Instead, traders would place a small amount to get a larger amount unless you will incur losses and debts within no time. If you are looking for short-term investment, spread betting is the place to make it happen for you. Most spread bets are usually held for a few days, rather than weeks or months. You get to choose what to bet on, so this is freedom in an endless number of different trading opportunities.
Spread betting is a margin-based activity, which involves placing a percent margin on positions as specified. Although, this also allows traders to extend their positions and potentially earn a lot more in the process. Depending on what you’re familiar with, there are different types of spread betting: futures bets, daily spread, rolling dailies, binary bets. In terms of long-term investment or betting, futures bets give traders the chance to control what happens shortly. Daily spread bets involve more of an intraday activity. The time frame fits within a day and is usually closed at the end of the trading day. The outcomes are usually not that high, when compared to long-term investors. Rolling dailies, is an action that is similar to daily spread betting but does not need to be closed before the end of the trading day.
Just like the stock market, there are different spread bet orders, such as market orders and limit orders. With a market order, you are executing your spread bet immediately and with limit orders you specify when a spread bet should be executed (and at what price). Apart from the two major order types, there are also other order types such as stop orders and trailing stops.
- Short–term rewards: Traders can easily generate favorable gains by placing reasonable and knowledgeable bets on all sell or buy positions. For example, if the share price of a company is rising and you believe it would go up, select the buy option or position. High leverage trading can help maximize potential profits.
- Tax freedom: From the examples above, we can see that spread betting is tax-free, commission-free trading.
- Diversity in portfolios: There is a diverse portfolio of assets and spread betters can access these markets using a broker. From commodities to stocks, more trading range means more money when trading.
- Flexible trading times: Traders can decide to be active during a certain period, depending on what is most convenient.
- Incur losses more than principal: If your principal investment is high and a trader placed a bet of $10, losses can be encountered if the asset does not go the trader’s way. If the price of the asset moves in the other direction, the trader might incur a debt.
- Volatility: There is often a wide trading range that develops for certain assets and this can be a temptation to all of them at once. Unfortunately, this can lead to many trading costs across different markets and potential losses. Traders need to try new markets on certain occasions but this must be done in a reasonable way and with the intent to test for strategies that work best.
- Platform structure: Often, a broker’s platform structure can make it very hard for people to earn money trading and this can also make it very easy to lose money.
According to studies by numerous parties (including the Financial Conduct Authority), roughly 82% of all people lost money when they started spread betting. That is a testament to the fact that it is highly volatile but it also shows that not enough traders are doing the proper research before getting started. Spread betting to a certain set of people might be considered to be risky, however, it is a legal activity that can gain you a lot of money if you plan well and don’t go beyond your budget. It is important to learn gradually. Test the waters, learn. Walk a little further, learn. Keep learning the market, and understand when to stop because in the long run, it is your hard-earned money and you don’t want to lose it all because of unexpected price movements.
Ultimately, traders always need to know the indicators and know what they are saying about the market. Spread betting markets can be highly lucrative and certain brokers allow for improved margin and high leverage execution. The financial markets have become a highly exciting world over the last few months and this is only going to continue in the years and decades that lie ahead. Traders can take advantage of these trends now by learning about the advantages of spread betting in trading.