In this article, we break down some essential concepts by asking and answering some fundamental questions about spread betting. This is meant to be a resource for beginners, covering the basics that veteran traders will already have a good handle on.
Spread betting is an economic trade rather than an investment. This distinction exists because you never actually have possession of the stock or currency you ‘buy’ or ‘sell.’
Instead, you’re wagering on how a market will move. Profit and loss is determined by the number of points the market moves in or against your favour.
Most economic markets are available for spread betting, though it varies depending on the broker you use. Generally speaking, you can place a spread bet on stocks, commodities, forex markets, indices and cryptocurrencies.
Spread betting is generally considered more of a risk than traditional investmenting. This is because the per-point wager can result in both large profits and losses.
Spread betting also permits traders to use leverage. While this can be a useful means to increase the profit of a trade, it simultaneously multiplies the possible losses of that trade.
To reduce the chance of losing a lot of money on any given trade, there are a handful of steps you can take to limit risk. This includes:
Carefully selecting your market
Implementing a stop loss order
These four simple steps will ensure your spread bets avoid taking on excess risk. All spread bets are inherently risky, so these concepts don’t eliminate risk, they merely reduce it.
Leverage is the practice of borrowing money to increase the value of your trade. It can be immensely valuable if your trade is successful, but compounds losses if it’s not. First, this is because you pay interest on the borrowed money. Secondly, this is because you have to pay back what you borrow in full, even if you break even or lose money from the trade.
Spread betting is considered a form of gambling, and is therefore prohibited in countries in which online gambling is disallowed. This includes the United States.
In the UK, spread betting is legal. It is also permissible in several countries around the world, including some in the European Union.
There are numerous spread betting brokers you can choose from. Take a look at our list of recommended spread betting brokers to see which is most suitable for you.