The concept of spread betting is very simple. The sell and buy price are called the bid and offer price. If you believe a market is set to rise, you buy at the offer price, or if you think the market will fall, you sell at the bid price. When you spread bet, you place the bet with a spread betting company. The spread betting company predicts where it thinks a share or index will stand at a point in the future. You decide whether you think the share or index will be higher or lower, and you place your bet accordingly.
In other words, you will never actually own the share or index; you will just benefit from its movement. If you aren't familiar with spread betting, visit Ayondo, click the 'Trading' tab and then click on 'Open Demo Account'. You will be allocated 100,000 in virtual money to bet with. Alternatively if you want to experience the real thing open a real money account with them and take advantage of their sign-on credit to trial out their platform.
Here are just some of the reasons why people choose spread betting -:
This make this form of trading very flexible; because while traditional buy and hold investors who have equities in their investment portfolio are getting more and more nervous about watching the values of their investments going constantly down, spreadbetters on the other hand can profit from market falls and make as much money from the declines as they would when they rise. Moreover, spreadbetters are able to switch sides easily so they can make more money out of a market if the price stops falling and starts recovering, while traditional holders can only watch the recovery and hope for the best.
These are just some of the advantages of spread betting over traditional trading - there are too many to list in detail here. But hopefully this will give you an idea as to why spread betting has soared in popularity in this country and around the world in recent years. If you're still unsure, open a spread betting demo account and find out for yourself.
Spread trading is primarily a short-term speculative tool, as opposed to longer term investing, however in some cases it can also be used for longer term holding. It can also be used as a hedging mechanism to protect a share portfolio against market declines.
Incidentally, one aspect of spread betting that is not often mentioned is that the plethora of rules that stock brokers and insitutions are continually subjected to trade in regulated investments bring in additional costs that are then passed on to clients. These would include the 0.5% stamp duty, CGT and of course dealing commissions that vary a lot between different firms of stockbrokers. These, as a whole have made short-term trading via traditional trading unattractive to say the least, particulary if you attempt to make money by buying and selling individual equities. Such costs don't apply when you spreadbet and while losses can't be offset against gains when using this trading instrument, the benefits and flexibility of spread trading are more likely than not to far outweigh any downsides.
UK spread betting firms now quote prices on thousands of individual shares, stock-market sectors, indices, commodities and currencies.These include -:
Spread bets are not offered on economic indicators, inflation can however be hedged by betting on commodities/bonds.
So where does the term 'spread' come from? If you buy and sell anything as a business, you need to buy at one price and sell at a different price in order to make a profit. Companies offering financial spread trading are no different. They have to absorb the 'market spread' and their own costs as well as make a profit.
What is a trading platform I hear you cry... Well its pretty simple really a trading platform is a software application that allows traders to open, close and manage all of their positions from one place.
Most spread betting brokers now offer a trading platform as a standard part of their broker account. It will be important that you feel comfortable with the software to feel comfortable with your trading.
Most spread betting brokers now offer a trading platform as a standard part of their broker account.
The features that are provided within the trading platforms of many spread betting brokers are pretty much the same. The key features and functionality of a trading platform should be as follows:
For more information on what is a trading platform you can also check out our full trading platform reviews and comparison areas.
The Spread is the difference between the price you buy at and the price you sell at.
Market Spread is the spread you would pay if you actually were to buy and sell the share.
The lower price or sell price is often called the 'bid' price. The higher price or buy price is often called the 'offer' price or the 'ask' price.
There are two timelines with spread bets: bets that finish today and bets that finish at the end of a quarterly cycle (the end of March, June, September and December). As an example, you can place bets on where BT will end the trading day or on where it will be in June. The end of the day or quarterly cycle is referred to as the expiry date.
When you search for a market on a spread betting provider's trading platform you will usually notice that you have been given a choice of timeframes. Each contract will have a slightly different spread. This is because for bets with a longer expiry date, the additional cost involved in running it for the longer period has to be included, and because of this the spread will be a little bit wider.
You don't have to keep the bet open to its expiry date, though. You can close your position at any time until the expiry of the bet. This is a great feature of spread betting, because if you've guessed correctly and are sitting on profit, you can grab it immediately. You can also 'roll over' a bet if you want to keep it open past the expiry date. Rolling over is cheaper than opening a new bet and you can roll your bet as many times as you choose. If you do not roll or close your bet, it will automatically close at the settlement price on expiry.
Tip: Essentially here by choosing the farthest future you are in effect buying time, I usually opt for a future unless I know it's a very short timeframe trade perhaps results or news or something of that nature.
When you bet, you bet a certain amount of money 'per point' or 'tick'. A point is the movement in a share or an index. For example, a share price movement from 313p to 317p is a movement of four points. A point doesn't always equal a penny, though. Sometimes it's a cent, sometimes it's a point or a fraction of a point, such as when you bet on an index.
If you bet £10 per point and the index moves 20 points in your direction, then you'll make £200 (£10 per point x 20 points). The money you make is free of capital gains tax (CGT).
It is essential to remember that when you bet you are trading your stake on a per point movement. You are liable for that open position in the market, and therefore you are not risking a 'fixed' amount. The outcome of the bet is as variable as market sentiment itself.
Spread betting is a geared action, which is one of the reasons why it's great for small investors. Because of gearing, even a small move in the price can give you a big return.
Let's imagine you thought Tesco shares were going to go up and you wanted to make money from this conviction. You could either choose to buy some Tesco shares and later sell them for a profit, or you could make an up bet with a spread betting company. If you bought 1,000 Tesco shares at 200p, you'd have to fork over £2,000.
But that's not the case with spread betting. With almost all spread bets, you only have to pay 10% of your total market position. In this example, you'd only need to have £200 in your account in order to make your bet.
If Tesco was at 200p when you bought your shares and then it moved to 210p when you sold, you would have made a 10p profit per share, and with 1,000 shares your actual profit would have been £100. A £100 profit on an outlay of £2,000 is a 5% profit. Your returns are much better with spread bets. That £100 profit on the spread bet outlay of £200 is a 50% profit.
So it is possible to start with a small account and make it grow?
Yes! Below is an example of a trader who started out with just £100 and built his account to over £700 - the £100 being the promotional credit of ETX Capital! The screenshots were posted to show that it is possible to trade a small amount and make it grow, the emphasis being on discipline and hard work. The profit may not be considered a lot by some but for newbies out there it shows that you do not really need big amounts of monies to start trading; you can start small and build up. This basically shows that if you are patient and plan your trades and use effective money management you can succeed at this business. More information on betting with small accounts is available here.
That's a basic introduction to the world of spread betting. But does spread betting sound the thing for you? Well, next time we'll learn how to open a spread betting account. You'll also see the importance of using a stop loss, and the potential of placing limit orders. Spread betters make use of very specific jargon. You'll be introduced to the basics of spread betting language. But that's all in the next course, on its way to you soon.
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