Spread trading is highly 'geared'. Gearing means that in order to make any given profit from spread trading, you will need less capital than if you were to actually buy sufficient shares to have made that same profit. Let's look at an example where we compare buying shares versus spread trading:
For the purpose of this exercise we will ignore spreads and costs.
You buy 1000 shares at £5.00 = £5,000 of capital
The shares go up to £5.30 and you sell for £5,300
You make 1000 shares x 30p = £300 profit (6% return on capital)
You use £5,000 of margin
You can place £50 per point bet on the share using all margin
The shares go up from £5.00 to £5.30 and you close your bet
You make 30 points x £50 = £1,500 (30% return on capital)
So you can make your capital work MUCH harder for you by spread trading than you can by buying and selling shares.
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