Spread Betting FAQs
InterTrader will answer all your questions on spread betting. Here you’ll find all the spread betting info you need to start trading with us. Learn what types of spread betting account we have, which trading markets are available, and how margin trading works.
Spread Betting FAQs
Though spread betting can offer investors with diverse trading styles the opportunity to benefit from their market research and chart analysis, you must remember that spread betting also involves risks. When trading on margin, losses can be enhanced just as much as gains. If, however, you 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.
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 spread betting provider to enable the trader to maximise potential gains (or losses, if the position does not work as anticipated).
Providers typically make margin requirements forcing traders to have a certain amount of money available in the trading account (generally anywhere from 0.5% to 10% of the total trade size) to keep the margin trade open and active. You should remember that, while margin trading can allow traders to maximise gains through larger position sizes, losses can be equally enhanced and you will be responsible for these losses if the trade moves adversely.
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 are held accountable for taxes after capital gains are realised. This liability might lead many to believe that spread betting is always the preferable method but this is not always the case. One 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. Some traders therefore prefer CFDs because they offer a higher level of liability protection.
UK residents have an added advantage when spread betting, as gains made from these trades are not subject to taxation fees.* Spread betting gains are not considered capital gains, as spread betting is technically considered to be gambling, and taxes are not required for this type of transaction.
Forex prices are sent via data feeds, which show the best available bid (purchase) and offer (sell) prices currently available from 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 derived from one bank and the offer price from another, 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 includes the amount that is charged by your spread betting provider to complete the transaction.
The major stock indices quoted by your spread betting provider 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). After these adjustments, the current value (often called the ‘fair value’) is sent to the data feed in your trading platform.
A profit target is the level where a trader chooses to close a trade once a certain amount of profit has been accrued. Targets 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 accumulated gains). Like stop-losses, profit targets can also be set in terms of point values or percentage movements.
Stop-losses are a vital tool that beginning traders should always remember to use. A stop-loss allows a trader to limit potential losses by placing an order to close a trade automatically 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 stops to close the trade if that amount is reached. Stops can also be set in terms of point values or percentage movements in trades that do not proceed as initially forecast.
Note that stop-loss orders are not guaranteed so you may not be filled at your requested level, for instance if the market ‘gaps’ suddenly. Stop-losses may be subject to slippage in fast-moving markets.
A trade entry is the price area where a position is initially established. You should remember that trade entries can be taken in different directions, either buying or selling. When, for example, you believe that an asset’s price has 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 price has risen too much and become excessively expensive, short (sell) trade entries should be considered.
Spread betting providers can provide traders with tens of thousands of different trading instruments, in a variety of different asset classes. These markets fall into the following categories:
- Equities (shares)
- Stock indices
- Interest rates
Some of the spread betting terms you will encounter include: trade entries, stop-losses and profit targets.
You can open a spread betting account very quickly and it is possible to start trading in a matter of hours. Most spread betting providers 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.