Spread Betting FAQs
InterTrader offers professional answers to frequently asked questions on spread betting. Learn what types of spread betting accounts we have, what available trading markets there are, what is margin trading? All the spread betting info you need to start trading with us.
How Do I Open A Spread Betting Account?
Spread betting accounts can be opened very quickly and it is possible to start trading in a matter of hours. Most spread betting brokers will ask you to fill out an application form (using basic identification information), and some will require a confirmation of your address (using a bank statement or utility bill); Once your account is funded, you can begin trading without restrictions.
What Types of Markets Can Be Traded?
Spread betting brokers are able to provide traders with tens of thousands of different trading instruments, in a variety of different asset classes. These markets fall into the following categories:
- Stock Shares
- Stock Indices
- Interest Rates
What are Trade Entries?
Some of the Spread Betting terms you will encounter in the beginning will involve the following phrases: trade entries, stop losses, profit targets.
A trade entry is the price area where a position is initially established. It should be remembered that trade entries can be taken in multiple directions, either buying or selling. When, for example, you believe that an asset’s prices have fallen too far and that a downtrend is ready to reverse, it is probably a good time to place a long (buy) trade entry. Alternatively, if you believe that an asset’s prices have risen too much and become excessively expensive, short (sell) trade entries should be considered.
What are Stop Losses?
Stop losses are another vital technique, and one that beginning traders should always remember to use. Stop losses allow a trader to limit potential losses by placing an order to close a trade at a certain level if prices move in an unanticipated direction. If, for example, you are only willing to lose £100 on a given trade, you can set your stop loss to close the trade if that amount is reached. Stop losses can also be set in terms of point values or percentage movements in trades that do not proceed as initially forecasted.
What are Profit Targets?
Profit targets are the levels where traders choose to close a trade once a certain amount of profit has been accrued. These can be set to close at areas where trends would be considered overextended, and prices are likely to start reversing (which would erode some of the gains that have accumulated). Like stop losses, profit targets can also be set in terms of point values or percentage movements.
How are Stock Prices Calculated?
The major stock indices that are quoted by your broker are always tied to a Futures market. This Futures market reflects the current price of the underlying asset and your final broker price is determined after some small fee adjustments are made. These adjustments are comprised of dividend payments (due before the expiration date of the Futures contract) and the cost of carry (interest rate fees). Once these calculations are made, the current value (often called the Fair Value) is sent to the data feed in your trading platform and you will be able to open new positions.
How are Forex Prices Calculated?
Forex prices are sent via data feeds, which show the best available bid (purchase) and offer (sell) prices that are currently being made available by a network of large foreign exchange banks. These prices are quoted in each forex pair (the relative value of one currency against another). In some cases, the bid price will be received from one price while the offer price, it all depends on which bank is offering the best price for each value. The difference between the bid and offer price is referred to as the “spread” and this is the amount that is charged by your broker to complete the transaction.
What Taxes are Charged in Spread Betting?
UK residents have an added advantage when spread betting, as gains made from these trades are not subject to taxation fees. According to the FSA, spread betting gains are not considered capital gains, as the odds favor the brokerage company rather than the individual trader. Because of this, spread betting is technically considered to be gambling, and taxes are not required for this type of transaction.
How are CFDs Different from Spread Betting Trades?
The most obvious difference between a Spread Bet and a CFD (contract for difference) is the way each is viewed in terms of tax liability. When trading CFDs, traders will be held accountable for taxes after capital gains are realized. This liability might lead many to believe that Spread Betting is always the preferable strategy but this, however, is not always the case. One additional benefit of CFD trading is that losses can actually be written-off on your tax liabilities. This is not the case for spread bets because these trades have no tax liability. For this reason, many traders prefer CFDs because they feel a higher level of liability protection.
What is Margin Trading?
Margin trading involves the use of leveraged position sizes where relatively small amounts of money can be used to fund much larger positions. For example, a trade using 10:1 leverage would enable a trader with £10 to open a position size valued at £100. In this case, the extra £90 is borrowed from the brokerage company to enable the trader to maximize potential gains (or losses, if the position does not work as anticipated).
Brokers will typically make margin requirements forcing traders to have a certain amount of money available in the trading account (generally anywhere from 2-10% of the total trade size) in order to keep the margin trade open and active. It should be remembered that while margin trading can allow traders to maximize gains through larger position sizes, losses can be equally enhanced and the trader will be responsible for these losses if the trade moves in adverse ways.
What Risks are Involved in Spread Betting?
Though Spread Betting can offer investors with diverse trading styles the opportunity to benefit from their market research and chart analysis, it must be remembered that Spread Betting also involves risks. This is especially when margin trading as losses can be enhanced just as much as gains. If, however, we implement proper money management techniques and limit margin to reasonable levels, most of these risks can be contained and longer term gains can be generated using stable and consistent investment strategies.