What is Spread Betting?
What is Spread Betting?
What is Spread Betting?
An Introduction to Spread Betting
Spread betting is a way of speculating on the movements of financial markets. The most popular financial markets include forex, the foreign exchange market; indices, such as the FTSE 100, Dow Jones, Dax 30 etc; commodities , such as gold or oil, and bonds.
The major benefits of spread betting are that a) speculators can take short positions, which is to say when a speculator believes a financial market will go down in value, as opposed to taking a long position (prices will rise) b) financial spread betting is tax free* and c) there are no commissions to pay.
Spread betting allows you to place long or short positions, incurring either profits or losses, without taking actual ownership of the financial instruments you are speculating on. This is in contrast to, for example, share ownership; owning part of a company traded on, for example, the London Stock Exchange.
Fluctuating Underlying Markets and Spread Betting by Points
Spread betting functions by speculating on the underlying price movements of financial markets. Profits or losses are determined by the price at which you buy and sell. Instead of ownership of shares or other underlying financial instruments, spread betting works by trading on a per point basis.
To take a purely hypothetical example, if the FTSE 100 was at 5977-5978, you could buy at 5978 for 10 per point. If the FTSE 100 goes up rises to 5988-5989 and you sell at 5988, you will have made a profit of 10 points or 100, ((5988- 5978) x 10 per point = 100).
Having said that, if you made the same trade and the market went down, your trade could be closed out at 5965 in which case you would lose 13 points or 130 ((5978- 5965) x 10 per point = 130).
Leverage
Spread betting, unlike share trading, uses leverage. This means that a deposit can be leveraged to command a larger financial position. In terms of share trading, each share is priced at a particular value. To buy, for example, 100 shares in a company, a trader requires 100 x the value of the share, plus the stockbroker's commission. In contrast, spread betting allows you to buy the same financial exposure to a company's shares or index, commodity, bond etc., in terms of points, using a normally lower deposit.
This smaller deposit can control a much larger financial value than it is actually worth. A deposit, for example, of a 100, might control a financial position going into thousands of pounds. The important thing to remember, which is where spread betting can be risky, is that the losses you could potentially incur might substantially exceed your initial deposit.
You should spend some time using the demo accounts offered by spread betting companies in order to practice and become familiar with the systems before risking your own money.
Spread betting is a geared investment product, it involves a high degree of risk to your capital and it is possible to lose more than your initial deposit. Please ensure that it fits your trading needs as it may not be suitable for all types of investor. Always ensure that you only spread bet with capital that you can afford to lose. Before making any trades, make sure that you fully appreciate all the risks involved and if necessary request independent advice.
* Tax law is subject to change or may differ if you pay tax in a jurisdiction other than the UK.
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