Spread Betting – Basics of Trading
What is Financial Spread Betting?
Financial Spread betting is a way of speculating on the future price movements in a given asset (usually stocks, commodities for currencies). This fast growing industry enables investors of all experience levels to trade with great flexibility and cost efficiency as an independent alternative to traditional investing.
What are the Advantages of Spread Betting?
One of the clearest advantages of Spread Bettingis that it allows UK investors to accrue financial gains that are not subject to capital gains tax. In addition to this, Spread Betting companies do no charge direct commissions, making Spread Betting an extremely cost-effective form of investing.
The flexibility of this type of investment can be seen in a variety of ways. Investors can realize profits during both rising markets (using “long positions” to buy an asset) and falling markets (using “short positions” to sell an asset). Another advantage can be seen with “margin” capabilities, which allow traders to place large positions using a relatively small amount of capital. These positions can be placed in a wide variety of markets (multiple asset classes) and potential losses can be limited in any trade with the use of “stop losses.”
How do I Open a Trade?
Spread betters look to capitalize on the future moves of a chosen asset class. So, if we believe that prices for an asset will rise in the future a “long” position would be established on the assumption that the asset is cheap and should be purchased before it becomes more expensive.
If prices do proceed in the anticipated direction, we would make gains equal to the difference between our original purchase price and the quoted value seen at the time our trade is closed. (To close the trade, we would simply place a “sell” order of equal size to balance the overall position at “zero.”) If, however, prices move in the opposite direction, we would then accrue losses equal to the difference between our opening and closing prices and that value would be subtracted from our trading account.
Let’s assume that Apple shares are currently trading at 395.50.
Investor 1 believes that Apple is performing well and that stock prices will rise going forward. Based on this assumption, he chooses to place a “buy” order (of £10 per point) at the current value.
Investor 2 disagrees with this logic and believes that Apple stock is likely to fall in the future. He places a “sell” order (of £10 per point) at the current stock value.
Apple Stock Gains:
In our first scenario, let’s say that Apple’s stock price rises to 405.50. Investor 1 was correct in his assumptions and he chooses to close his position in positive territory, capturing gains of £100 (10 points x £10).
Investor 2 sees that his forecast was incorrect and decides to cut his losses in the same area, creating a loss of £100 (-10 points x £10).
Apple Stock Drops:
In our second scenario, let’s say that the price of Apple shares falls to 390.50.
Here, Investor 1 was incorrect in his forecast and he accrues losses of £50 (-5 points x £10) after he closes his position by placing a “sell” order (bringing his total position size to “zero”).
In this case, Investor 2 was correct and he decides to close his position (he places a “buy” order) at current levels, capturing a gain of £50 (5 points x £10).