What is spread betting

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What is spread betting

What is spread betting

What is spread betting?
 
In simple terms – spread betting is where you win or lose money in the form of points by the margin in which the value varies from the spread of expected values.
 
In Financial spread betting the margin in which the spread bet is made would be based on shares or an index.
 
This can be highly enjoyable, accessible and cost effective way to trade as an alternative to trading shares with a stockbroker.
 
The Advantages of Financial spread betting includes:
 
  • You do not need to pay stamp duty – when trading shares stamp duty is normally 0.5%
     
  • Earnings are tax free – no need to claim!
 
  • Commission is not paid; some brokers take a very low commission. – No making money for your stockbroker.
 
  • You can profit if the market is up or down – you can trade and be prosperous even when the market is down by spread betting a decline in price.
 
  • You can trade a broad range of index’s such as ftse 100, ftse 250 , NASSAQ and even commodities.
 
  • Risk can be minimized by implementing a stop loss.
 
  • You can invest very small – trading with a stockbroker will normally have a minimum limit. Some spread bet brokers allow bets as low as 10p-50p a point!
 
Disadvantages include:
 
  • Certain markets can be volatile – make sure a stop loss is placed on your trade.
     
  • Not very well suited for a long-term holding – Please see CFD’s if long term holding interests you.
     
  • You do not have a materialistic holding in the company and do not benefit from dividends paid. 
     
What are the trading options?
 
Spread betting allows you to invest in more than shares such as various index’s.
 
These include:
 
  • FTSE, NASDAQ on different stock exchanges e.g. London stock exchange or New York Stock Exchange
 
  • Currencies and FX
 
  • Commodities such as precious metals, oil and even wheat
 
  • Interest Rates - short term and long term
 
  • Futures and options
 
  • Bonds

     
Example of how a spread bet works

Shares
 
Let’s say a FTSE 100 share is trading at £2.60 and you buy a point for £5. When the share rises to £2.80 at 0.1 per point to increase in value, and you would have made a profit of £10. The Latter applies if you spread bet on the share to fall.
 
For example the share goes from £2.60 to £2.40. If you have bet for the share to decrease in value at £5 per point you have made a profit of £10.
 
Here is an example of making a loss:
 
The same share trades at 2.60 and you have bought the same at £5 per point at 0.1. You have bet on the value to rise but it has fallen to £2.50, resulting in a total loss of £5.

Margin call
 
One should be cautious of a margin call; because if the price that you have bet on moves excessively against you, it will result in having to pay over what you have deposited. If the price moves too much it could result in losing your position.
 
To prevent this from happening you can place a stop order. A stop order is where you set a limit to close your position.
 
You can also set a limit order. A limit order is where you can set a better price to buy in, and if the value reaches this limit, you will automatically buy into the trade. 
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