Financial spread betting has become extremely popular since the turn of the 21st century. In the UK, Tradefair has estimated a growth of 30-40% in the spread betting market, and according to the FSA there are now close to 1,000,000 spread betting accounts, with 30,000 opened in the last year.
What is Spread Betting?
Unlike fixed odds betting, spread betting involves speculating on the movement of a particular index or stock. You make or lose money depending on how far the index moves (measure in points), because we are wagering a fixed amount per point (pip), which can move either up or down. There are two types of spread betting tactics: going long or short-selling. If you think the stock of a financial index on the FTSE for example will go up then you can big low and sell high once the stock increases in value. If you close the transactions when the stock is higher than you will make a profit.
On the other hand, you can also sell high and buy low which is also known as short-selling. Short selling is when you borrow money from the spread betting platforms to lease stock at their offer price, then if the price increases you can sell the stock onto another spread bettor and make a profit on the different between the buy and sell price.
How to Start Spread Betting
In order to start spread betting, you will first need to open an account at a spread betting platform. There are loads to choose from (with over 20 spread betting platforms in the UK alone). Once you pick a stock you then ask your spread betting broker for the offer (buy) price. Depending on whether you think the market will move up or down, you can wager a fixed amount per point (pip). For example, if you wager £10 per point on Microsoft stock and it moves up 10 points from 400 to 410 then you will make £100 profit. On the other hand, if it decreased in value by 10 points than you would lose £100 from an initial deposit of £10.
At the end of the day or when you decide to close your spread bet you will need to close at the bid (sell) price. This is slightly lower than the offer price so that the spread betting platform can take a commission. The difference between the offer and bid price is also called the “spread”. A tighter spread is better for a spread bettor because it allows him to make a bigger profit margin on his trade. While 10 or so years ago the average spread was around 10 points, the increasing competition of spread betting companies has driven the spread down to just 1 point.
One of the main advantages of spread betting is that in the UK it is tax-free (unlike conventional trading) meaning that you don’t have to pay capital gains tax or Stamp Duty on your profits. Spread betting also lets you trade on margin and with leverage. This means that you can borrow up to 10:1 from the spread betting platform on your deposit i.e. if you deposit $100 you can take up positions worth up to $1,000.
Although increased leverage also means the risks are higher as you can end up indebted to the broker, it also means that a regular trader can make bigger profits from large value trades with small starting capital. You can also profit massively from small pip movements in the bonds, indices, FOREX or commodities markets unlike conventional share trading which requires the actual purchasing of financial instruments.
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