Ever thought you would like to trade stocks and shares more frequently, but were somewhat worried that the commissions you pay your stockbroker every time you trade eat into the value of your shares portfolio? Financial spread betting could be the answer.
You might have already experienced buying and selling shares through a traditional stockbroker. But what if you could access more markets and have more investment choice? What if you had the potential of being able to profit in any market condition while initially paying only part of the full market value of the deal? What if there was no separate commission and everything was built into a narrow spread?
Let's face it; the idea of making money out of backing your own judgement is very tempting, particularly when you believe that there is an anomalous situation in stock market valuations which you think will be corrected or when you spot a trending market and want to take advantage of it by riding the rise or fall so long as it lasts. Financial spread betting permit you to do this efficiently without needing access to vast amounts of capital.
Today I want to address a question I'm often asked by spread betting newbies or those thinking about getting into the game but need a little extra convincing - namely, what are the advantages of spread betting over other forms of trading?
Arguably, perhaps the biggest benefit is that spread betting on commodities, indices and other financial instruments is that it isn't technically trading at all as you don't ever actually own any assets, you just bet on their movements.
This means, in the UK at least, spread betting is classed as a form of gambling rather than financial trading and as a result saves you a whole heap of costs and taxes that other traders incur - spread betting profits are free of capital gains tax, there is no stamp duty on trades and you don't have to pay any fees or commission to brokers.
But there are also many more benefits to spread betting than just tax issues and several of these help to make spread betting particularly accessible for those with limited experience in the markets or with limited funds to play with.
For instance, with spread betting you can start by only risking small amounts, say £1 for each point movement, and you can also use stop loss orders to provide a safety net and terminate a bet once your losses hit a certain point. This doesn't limit your losses to £1 however. Even a small movement in the price could result in relatively large profits or losses being realised.
It also allows you to take advantage of bear markets (those which are in decline over an extended period) by 'going short' i.e. betting on the value of an instrument to fall, something that, before spread betting came along, was really only open to the wealthy and professional traders. This is because, with spread betting you can make money from a falling stock or commodity price in much the sam way that you can from a rising one. There's a number of advantages to spread bet vis a vs regular betting and FX trading, see AVATrade's financial spread betting program for more on this.
As we have already said, spread trading has really taken off in the UK in recent years and is certainly my preferred method of trading the markets.
Although it has been available for a while to those in the know, it is the Internet and the ability to trade with live prices on-line that has been the catalyst for it's recent explosion in popularity. The Internet also enables non-UK residents to trade with UK spread trading companies, but check your local laws and tax regulations. For example, spread trading is currently not available to USA residents. UK spread trading companies are not allowed to let USA residents open accounts. Whereas at the time of writing it is becoming very popular in Europe as well as Australia with UK companies opening branches in Australia.
For ease of explanation, I will assume that you are a UK resident. The reason why spread trading is not available in all countries is the very reason why it is so popular in the UK - because it is classed as gambling. But in the UK that gives us a huge tax advantage.In terms of trading costs, other forms of trading such as buying and selling shares, can mean you incur costs which include things like -:
For me, the convenience of the available tools and the tax arrangement vastly outweighs any advantage that even a good broker would offer. And (for me personally) it is even better than direct access shares dealing.
All trading and investment carries risk, with some investment products carrying a higher degree of risk than others. Financial spread bettings rests at the higher end of the risk balance in that, in the worst case scenario, your losses are theoretically uncapped but in practice the risk can be controlled through the use of stops and sensible risk management. In fact, you shouldn't get involved in day trading or other short-term trading products unless you are willing to follow some simple rules of common sense.
When first starting out, it is good practice to start small and limit yourself to dealing in just a few markets. Also, it is sensible to tie in guaranteed stops to your trades, irrespective of the cost premium particularly if you are trying your hand at shorting or trading unfamiliar markets. In some situations, without the additional protection that guaranteed stops provide, there is a risk that your potential loss is unlimited. Also, it is important that you research the company or other market you are going to trade. You should aim to become an expert in your chosen sector. But more importantly make sure that you use your own judgement to open or close trades, as opposed to relying on 'hot tips'.
Make sure to monitor your positions while they remain open - news travels quickly and the markets can move rapidly meaning that events can have a dramatic effect on open trades. Always be prepared to cut losing positions without allowing your emotions to interfere. If you follow these simple rules you can reduce your downside side substantially.
The main problem with spread betting is that people see how quickly money can be made, they get a taste of it and imagine an easy life, trading for a living and being a big swinging dick, the reality is that it takes hours sitting in front of a monitor and is on the whole pretty soul destroying when you are not in a winning position.
Not everyone should use this trading product. Spread betting does demand a degree of discipline and courage, as well as the capacity to accept that you can't always be right and that losses are part of the business. Being emotionally detached is absolutely essential if you want to continue computing dispassionately the chances of wins or losses as circumstances change at speed.
You need to open a spread betting account. Usually, the providers will ask you to make a deposit - normally an amount around £1,000.
Remember that dealers are not there to give you advice; you are expected to know what you are doing although they will normally try to help those who tell them that they are beginners. Do also keep in mind that telephone conversations with dealers are recorded to avoid misunderstandings.
The content of this site is copyright 2016 Financial Spread Betting Ltd. Please contact us if you wish to reproduce any of it.