subject: An Introduction To Spread Trading And Trading The Stock Markets [print this page] When you look around the internet there are numerous get rich quick sites. A good number of these focus on the financial markets, be it the currency markets or penny stocks and shares. Some schemes are offering automated web-based programs to let you buy and sell foreign exchange rates. Others have sure-fire-dead-cert-cannot-possibly-fail-tips.
I think you know where I am going with this. If the tips are that good, if the automated programs are that good then why would anyone sell them etc?
All good investment news stories, blogs and articles will tell you that when speculating on the financial markets you need to understand that there are risks. Whether you use the forex markets, ETFs or just trade shares, you can lose money.
So what options are there for those wanting an investment option which offers risk management tools, tax benefits* and access to thousands of global markets?
Here in the UK, and increasingly across the international community, many think that spread trading is a suitable solution.
I have talked about the fact that there are risks when you invest. All forms of speculation or investment, from trading stocks and shares to having a pension to buying a house, have a negative side. When spread trading you can lose more than you initially staked.
It can be useful to think about some of the other areas that the follow warning notice covers; 'spread trading carries a high level of risk. Ensure that spread trading matches your investment objectives. Make sure you familiarise yourself with the risks. Where necessary, seek independent advice'.
That said, you are able to add a limit to the size of your position to reduce your losses but not your profits. You could also reduce your trades by using smaller 1 per point or $1 per point stakes.
To gain a little exposure you could simply trade the popular markets such as the Stock Market Indices, ie speculate on whether the FTSE 100, Dow Jones, German Dax 30 etc will rise or fall.
With any of these, as mentioned, you can trade 1 per point or $1 per point etc. If you speculate on the FTSE 100 to go up, with a 1 per point stake, and it goes up by 115 points then you would make 115 points x 1 per point = 115.
Note that you can trade the markets in Dollars, Sterling or Euros. If you want to trade in Euros then 115 points x 1 per point = 115.
Of course, should the market move against you, dropping by say 95 points, then with a 1 stake you would lose 95 points x 1 per point = 95.
Obviously this would not be a great start. However, with some firms you can add a Stop Loss at let's say, 50 points (note that not all Stop Losses are guaranteed).
If you were trading the FTSE 100 then your position would be closed if the FTSE 100 moved against you by 50 points. Therefore, instead of losing 95, you'd only lose 50 points x 1 per point = 50.
If however, you correctly predicted the direction of the FTSE then your upside would still be 115 if it moved 115 points or 80 if the FTSE 100 moved 80 points.
When spread trading there are plenty of other positives, not just this risk management element. Spread trading gives you access to a wide variety of global markets that you can trade including stocks and shares, indices, forex and commodities markets.
In contrast with more traditional share trading, you can take short positions on a market. Financial spread trading offers you the option of trading in either direction. This means that if your research leads you to think that the price of Gold is going to increase then you can speculate on it to rise. If you think the price of Coffee will go down then you can speculate on it to fall.
There is no exchange of any assets or rights; instead you merely speculate on the future price of a market. Therefore, spread trading profits are not subject to income tax, capital gains or stamp duty*.
Because you are dealing with a spread trading company there aren't any broker's fees.
You would be forgiven for thinking, this sounds very positive but what's the catch? Well, as mentioned previously, there are risks. Therefore, before you trade perhaps we should consider an example in more detail:
If you decide to speculate on the FTSE 100 then, on visiting a spread trading website like Financial Spreads, you may find a spread trading price of 5519 - 5520.
This means you can speculate on the FTSE 100 to move higher than 5520 or to move lower than 5519.
When spread trading, you trade on every unit the market increases or decreases; in the case of the FTSE 100 market a unit is 1 point of the index's price movement.
For this instance, you could choose to stake 2 for every point the FTSE 100 increases or decreases.
If you were to buy the FTSE 100 at 5520 and the index went up then the spread might become 5567 - 5568. If that were to happen, you might decide to close your spread trade at 5567.
Your Profits (or Losses) = (settlement value of the market - opening value of the market) x stake per point
Your Profits (or Losses) = (5567 - 5520) x 2 per point stake
Your Profits (or Losses) = 47 points x 2 per point
Your Profits (or Losses) = 94 profit
However, if the market were to drop down to, as an example, 5476 - 5477, you could choose to close your position to prevent further losses. If so, you would sell at 5476.
With the same 2 per point stake:
Your Profits (or Losses) = (settlement value of the market - opening value of the market) x stake per point
Your Profits (or Losses) = (5476 - 5520) x 2 per point stake
Your Profits (or Losses) = -44 points x 2 per point
Your Profits (or Losses) = -88 loss
If you are looking to trade the markets then you can trade with regulated companies like FinancialSpreads.com.
And don't forget, a key element of trading is keeping your greed under control. If you employ small stake sizes and use a Stop Loss then that can help to lower your risk.
* Based on current UK tax law. If you pay tax in another jurisdiction then tax law may vary.
