The Basics of Spread Betting
All you need to decide is whether the price of an asset will move up or down and at which price to buy or sell in the market. Spread betting is a convenient way to try and make a profit without the added costs and transactional limitations that come with physically owning a security.
You should always keep in mind that spread betting uses leverage which maximises both your potential profit and your risk, and you can lose more than your initial deposit. You should use risk management measures and build your spread betting in small steps, starting from the basics.
How it works
To start spread betting, choose an asset you would like to trade. For example, gold, the euro, the FTSE 100, or shares in Microsoft. Then you have to decide the direction in which the price is going to move. If you believe the price will rise you will buy the asset (also referred to as ‘going long’). If you believe the price will fall you will sell the asset (also referred to as ‘going short’).
Your trade is in the form of a spread betting position based on the price of the asset. For a long position, you make (or lose) your stake amount for every point the price rises (or falls) from your opening price. For a short position, you make (or lose) your stake amount for every point the price falls (or rises) from your opening price.
When you place your trade you should also decide your entry level (the price at which you will buy or sell the asset), your profit target (the price at which you will exit the trade if the price moves in a favourable direction) and your stop-loss level (the price at which you will exit the trade if the price moves in an unfavourable direction).
Placing your first trade
Once these factors are understood, you are ready to place your first trade. Placing trades is a relatively simple process, which includes the following steps:
- Choose your market (e.g. the S&P 500, the Canadian dollar, Brent Crude Oil)
- Choose your price direction (buy or sell)
- Choose your position size (your stake per point)
- Choose your price levels (entry level, profit target, stop-loss)
Then it is just a matter of managing your open position, which involves checking your running profit or loss and monitoring price activity in the market.
Market-neutral spread betting
When you open a spread bet you’re not actually making a physical purchase or sale in the market. With most spread betting providers this means you’re betting against your provider on how the market will perform. With InterTrader, however, we cover every bet you place by trading in the market ourselves. So we have no conflict of interest – it makes no financial difference to us whether you win or lose. Find out more about market-neutral execution.
New to spread betting?
There are some important factors that new spread betting traders should consider before beginning to trade.
Beginners should always keep in mind that spread betting is not like gambling in a casino. It is always wise to choose assets that you are familiar with (and are willing to research). Additionally it is advisable to opt for a spread betting provider that offers free educational materials, low trading costs, and a user-friendly trading platform to give you greater confidence when placing your orders. Consistent and reliable customer service is also an essential feature.
Advantages and risks of spread betting
As with any investment, profit potential comes with the risk of losses. These risks can be magnified when traders use leverage (margin) excessively or fail to use protective stop-losses. You should note that stop-losses are not guaranteed and may be subject to slippage and market gaps in volatile market conditions.
One of the clear advantages of spread betting is that spread betting profits in the UK are tax-free. (However, tax treatment depends on the individual circumstances of each client and may change in the future.) With a competitive spread betting provider you will also pay no commission on your trades, gaining access to a flexible range of markets often 24 hours a day.
For all these reasons and more, spread betting is becoming an increasingly popular alternative to traditional investments for those looking to profit from rising and falling movements in the financial markets.