How to Trade: Spread Betting
Spread betting and traditional trading
With a traditional speculative investment you identify an asset that you want to trade: company shares, a futures contract, a currency. Typically you think the asset is about to increase in value, so you make a physical purchase: a number of shares or contracts, an amount of your chosen currency. If you are right and the asset’s price rises you will be able to sell your investment later for a profit.
With spread betting the process of identifying your trading targets is much the same, only, instead of making a physical purchase, you open a spread bet against the performance of the underlying asset. The spread bet replicates the risk-return of the equivalent purchase but, instead of having to pay the full value of your investment, you only have to deposit a fraction of the full value to open your position. Thus your investment capital can command a much larger position.
The deposit is intended to cover potential losses, but remember you can lose more than your initial deposit on any spread betting position. Therefore, with any spread betting portfolio, you should pay special attention to risk protection. InterTrader lets you place a stop-loss on any spread betting position you open. (Stop-losses are not guaranteed and may be subject to slippage and market gaps in volatile market conditions.)
Another key difference is that spread betting makes going short a simple process. Traditionally you would have to borrow the asset in order to sell it and then buy it back later at (hopefully) a lower price, to make a profit. With spread betting you simply open your position at the ‘sell’ price rather than the ‘buy’ price. You will then make a profit times your unit stake for each point the market falls below your opening price.
Become a better trader
There are two main aspects to trading success: identifying profitable trades and building your investment goals into a trading plan. The first of these seems the most obvious, you need to predict market moves with a reliable degree of accuracy, but the second can have a greater impact on your long-term performance.
To identify trades you should learn and adopt some methods of market analysis, either technical analysis (based on the study of historic price movements), fundamental analysis (based on the study of financial statements and macroeconomic data), or a close study of the effect of global news on specific markets. Typically a trader will combine elements of all three of these methods into a regular analytic process.
To develop your trading plan you need to set short- and long-term income targets, decide the markets and timeframes you will trade and, critically, set down the most you are prepared to lose on individual positions and across your account. This will give you a framework for your day-to-day trading, and allow you to refer individual trading decisions to your overarching plan, without getting carried away in the moment.
Spread betting advice
Spread betting presents a unique set of challenges in addition to those every trader faces, due to the benefits of this form of trading:
How frequently will you trade?
Spread betting with an online platform gives you the opportunity to trade a wide range of markets very quickly. But you should ask yourself whether high-frequency trading suits your trading style, as identified in your trading plan.
Under UK law, profits from spread betting are exempt from tax and stamp duty. This can make a considerable difference to your bottom line, but you should remember that tax treatment depends on your individual circumstances and that tax law can change. Take independent advice if necessary.
Pay attention in your market analysis to possible downward movements. With the ease of opening short positions, falling markets are a major target in financial spread betting.