Prices rise and fall in the financial markets on a minute by minute basis. Spread betting allows you to leverage price fluctuations in the financial markets in order to make money. Instead of buying stocks, shares or any other assets, you speculate on whether the price of the asset will rise or fall. You can also bet on financial instruments such as interest rates. How accurate your predictions are determines how much profit (or loss) you make.
The ‘spread’ is the difference between the offer price and the bid price. The costs of trading are factored into the two prices, so when you buy an asset, you pay slightly more, and when you sell, you pay slightly less.
An Example of How Spread Betting Works in Practice
To give you an example of how spread betting works, let’s use a simple example. In our example, we are going to speculate on which way ABC shares will move. ABC shares have a sell price of 95.10 and a buy price of 95.25. You decide to buy shares in ABC for £10 per price point because you suspect the value of ABC stock will rise following a positive quarterly accounts statement.
A week later, you are indeed correct and ABC shares rise to a sell piece of 95.75 and a buy price of 95.90. You decide to sell at this point, which gives you a profit of £500, minus any fees. If you had decided to sell instead of buy, you would have lost £800, plus fees. Conversely, if you had gone ‘long’, but ABC announced its profits were down by £500 million on the previous quarter and share prices fell, you would also have lost money.
The Benefits of Spread Betting
Spread betting is popular with investors because it offers small margins. You don’t have to use your full capital to trade, as all trades are leveraged. This means potential gains are far higher than your initial investment. You are not buying the asset; instead, you are betting on whether the asset will rise in value, or fall. However, although you can trade using small amounts, there is always the risk that the market will move in the wrong direction, which could expose you to large losses.
Spread Betting Terms
- Going ‘long’ means that you believe the market will rise.
- Going ‘short’ means you believe the market will fall.
Anyone can have a go at spread betting. Popular online investment platforms such as ETX Capital let you open spread bets in a wide variety of markets, including forex, shares, interest rates, commodities, options, and more. This allows investors to speculate in markets that are normally inaccessible. Many popular investment platforms are also commission free.
Spread betting is a 24/7 activity. Even when the underlying markets are shut, you can still open a position. It’s easy to place a spread bet. All you have to do is choose your market, speculate whether the asset will rise or fall in value and whether you are going to buy (go long) or sell (go short), and then decide how much you want to bet on your chosen position. Once you confirm your position, it’s open.
Spread betting is easy, but it’s a good idea to practice before you make trades for real. Open a demo account, pick a trade, decide upon your position, and follow it to conclusion. This will enable you to formulate a successful trading strategy, risk-free.