subject: The Stock Markets And Reducing Your Risks [print this page] It is a simple fact that when you trade the markets there will be risks whichever trading format you make use of. When using share trading, ETFs or CFDs you can lose money.
So where should you look if you want an investment option which offers access to global markets and also offers tax efficiency?
In the UK, and increasingly across the international community, many investors think that spread betting offers a realistic solution.
As we have discussed, there are risks when you invest so when speculating you should always remind yourself that the markets can go down as well as up. Note that with spread betting you can lose more than your original stake.
The following risk warning also gives you a couple of other handy pointers, "Spread betting carries a high level of risk to your capital. Before trading, ensure it matches your investment objectives. Make sure you familiarise yourself with the risks. Seek independent advice where necessary".
Small Stakes and Stop Losses
At the same time though, you can put limits on your spread bets which can help reduce your losses without affecting your potential profits. You can also employ smaller stake sizes such as 1 per point or $1 per point.
To gain a little exposure you could just trade the popular markets such as the Stock Market Indices, ie spread bet on whether the Dow, FTSE DAX, etc will rise or fall
If you speculate on the FTSE 100 Index to go up, with a 1 per point stake, and it goes up by 60 points then you would make 60 points x 1 per point = 60.
Of course if the market went against you, dropping by say 75 points, then with a 1 stake you would lose 75 points x 1 per point = 75.
That would not be a great start. However, with firms like City Index you can add a Guaranteed Stop Loss at let's say, 40 points.
If you were trading on the FTSE it would simply mean that your trade would be closed if the FTSE moved against you by 40 points. Therefore, instead of losing 75, you would only lose 40 points x 1 per point = 40.
Of course, if you correctly predicted the direction of the market then you would still make a profit of 60 if it moved 60 points or 55 if the FTSE 100 moved 55 points.
Spread Betting Advantages
Risk management is merely one example of the benefits of spread betting.
There are a wide range of markets on offer. You can trade thousands of markets from the highly traded Dow Jones and Euro/Sterling FX rate, to the less traded Silver, Dollar/Forint and US Bonds markets.
In contrast with more traditional share trading, you can take short positions on a given market. That is to say financial spread betting offers you the option of trading in either direction. If your research leads you to believe that the German stock market is going to increase then you can speculate on it to rise. On the other hand, if you think that the German stock market is likely to fall then you can speculate on the stock market to go down.
Also, in contrast to normal share trading, you do not pay any brokers fees or commission charges when you trade.
So whats the catch? We have already considered the risks with investing. Remember that using smaller stake sizes and applying a Stop Loss can lower your risk.
* According to current UK and Irish tax law. This may change or differ depending on your personal circumstances.
