Financial Spread Betting - A Trader's Guide

Getting Started

Introduction to Spread Betting

Welcome to the world of spread betting. The Financial Spread Betting Course will introduce you to the ins-and-outs of this form of trading. In fact, by the end of the course, you should be set-up and ready to start spread betting. Over the next 8 lessons you'll learn how to open a spread betting account, and how to use stop losses to minimise losses. The course also explains how to use world indices to make big money. And if you're having trouble choosing the right trade? Well, you'll learn how fundamental and technical analysis can help you spot that winning trade - by both going long and going short. At the end of the course, you will also receive a full glossary of spread betting terms, something that no spread better can do without. Well, without further a due, let's get started.

Spread betting is creating a revolution in the financial markets by allowing everyone access to a new world of opportunity. There are no barriers to entry with spread betting, apart from your level of enthusiasm. Even money should not be a problem and you do not need to have City experience.

For once it is not an area where those in the City get to gain at the expense of all those who do not belong to their elitist club. Indeed, in many ways, with spread betting, private investors hold all the aces. And soon, you'll hold all the aces too.

What spread betting is - and isn't

The type of betting you are probably most familiar with is rather different from financial spread betting. In normal betting, you are taking a view on a horse race or a football game and are looking for a particular result. But in financial spread betting, the bet that you are making is not this fixed result, a single moment in time. You don't 'bet' that BP shares will hit 439p on 28 January, for example. Instead, you place a bet on whether you think a share or a market will be higher or lower in a few months than it is today.

Spread betting should be regarded simply as a way of backing your view on where the financial markets are going. Like anything else, the more you get it right the more money you make. But it is not a game. If you are wrong you will lose real money.

How spread betting has revolutionised the market

Spread betting was first offered by Stuart Wheeler in 1974 when IG Index opened its first market on the gold price. As with share futures, clients were able to bet on where they saw the gold price going in the future. This product took off rapidly and soon spread to the financial world. In 1985, IG Index offered its first financial spread bet on the FTSE 100 index. The rest, as they say, is history. And now you too can use spread betting to maximise your gains.

Six advantages of spread betting

There are six main advantages to spread betting:

Spread betting profits are tax free
The major advantage of spread betting is that all profits are free of capital gains tax (CGT). It is difficult enough right now to make money on the markets, without the Inland Revenue taking away a large proportion of the gains.

You can minimise risk by restricting your losses
With spread betting, you can guarantee your 'stop loss', or the point at which you exit your trade. A conventional share purchase also allows you to set a stop loss, but this is not guaranteed. Therefore, when your share moves a great deal overnight, your broker may not be able to get you out the next morning at the stop-loss price you requested. But spread betting is different. Even if the shares move a great deal, you'll still be taken out of the bet at the guaranteed stop-loss price you asked for - the spread betting company has to swallow the extra cost itself.

Use bear markets to your advantage by going short
'Going short' means reversing the normal process of buying low and selling high. When you go short you first sell high and then buy low at a later date. You do this by borrowing shares from a broker in order to sell them. When you buy the shares, you're actually merely giving back the shares you borrowed. The further a market falls, the lower your buying price and the more profit you'll make.

Going short of a market or share is something that only insiders or the rich were able to do until recently. In a bear market, going short is one of the few ways of making money and spread betting is the easiest and most efficient way of doing this.

Here's an example on how to profit from going short:

You believe that AstraZeneca is overvalued.
- The spread betting company quotes you 1864 - 1872.
- You 'sell' £30 a point at 1864.
The market then slumps, dragging AstraZeneca with it.
- The company is now quoting AstraZeneca at 1844 - 1852.
- You decide to close your position at 1852.
Your profit is (1864-1852) x £30 = £360, free of capital gains tax.

You can start small with spread betting - before hitting the big-time
With spread betting you can choose exactly what the size of the bet is going to be. The range is from 1p 'a point' with financial spreads to hundreds of pounds per point. This means that you cannot only trade as small or as large as you like, you can enter and exit positions in stages.

You can lock in some profits, but keep the bet open
Unlike betting on a horse, with spread betting you are not locked in until the result is known. You can close a bet at any time, even just a few seconds later. And you can also close off part of the bet to lock in some profit, but keep the remainder of the bet open in order to try to make more money.

Use it to hedge your portfolio
Hedging has only been available to large institutions, banks and wealthy individuals until very recently. As an example, if you think the property rise has been unsustainable, you can hedge against the value of house prices going down by spread betting on the property market.

Small investors can now compete on the same level as the large financial players, giving the equity market a new dimension. This aspect of spread betting is still a point that is under-emphasised in the mainstream financial media. In some ways this is hardly surprising, because if you gain knowledge of even the most basic aspects of spread betting you should be able to manage your own financial fate at least as well as the so-called professionals.

The facts about spread betting

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, log on to Tradindex and click on the 'Free virtual account’ icon. Then register for a 'player' account and you will be allocated Ł20,000 in virtual money to bet with.

More information on the Pros and Cons of using spread bets as a trading instrument is available here

Bets are based on time

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.

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.

The amount you are risking moves with the market

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.

The value of gearing

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.

Do you like the sound of spread betting?

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.

>> Go through our tutorial - Getting Started

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