A Beginner’s Guide to Financial Spread Betting

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Financial spread betting is an interesting way to make money. It isn’t for the faint-hearted – like most forms of financial speculating – but if you understand how spread betting works, and you have a talent for predicting which way the markets will go, you can make some serious cash.

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How Financial Spread Betting Works

Markets move up and down. Currency pairs, shares, and indices rise and fall in value. Small movements occur continuously, but over the course of a day, a financial instrument can move quite considerably in either direction.

When you place a financial spread bet, you are betting on which way the instrument will move. Using shares as an example, if you predict Facebook shares will continue to fall and the market agrees with you, it’s a profitable decision. If the market decides Facebook isn’t a lost cause and Facebook shares rise in value again, you will make a loss.

 

What Can I Bet On?

The beauty of spread betting is that you can speculate on virtually anything. Financial spread betting is the most popular, with people betting on forex, indices, commodities, and even interest rates, but if you get bitten by the bug, you can also bet on sporting fixtures and even politics.

 

What Does Spread Mean?

The term ‘spread’ is the difference between the offer price and the bid price quoted by an online financial spread betting company.

For example, say the Wall Street 30 is trading at 25403 and a spread betting company offers you a quote of 25403.2-25402.7, i.e. a 0.5 point ‘spread’. If you believe the Wall Street 30 will rise, perhaps in response to news that US manufacturing output is strong, then you’ll buy at 0.7 above 25403.2, which is 25403.9. If you are correct in your prediction, then you will make money.

 

Placing a Bet

The bet is the amount you bet per movement of the financial instrument you are betting on.

The more accurate your prediction of the market or instrument’s movement is the more you will profit, and vice versa. Let’s use the Wall Street 30 as an example of how spread betting works. If you bet $10/point that the Wall Street 30 will go up, and it does, by 50 points, you will gain $10 x 50 = $500. If the Wall Street 30 went 60 points in the opposite direction, you would lose $600.

 

Understanding Bet Durations

Spread bets have a fixed timescale, but you are always free to close your position at any time.

A daily funded bet is typically used to speculate on short-term market movements, for example, currency pairs. The spread betting company will charge a fee for each day that the bet remains open.

Quarterly bets are better for long-term positions, as costs are included in the spread. These are ideal if you are tracking a financial index and suspect it might be dramatically affected by something big. For example, anyone who placed a spread bet on the likelihood of the FTSE 100 falling in the wake of the EU referendum vote in 2016 would have made a killing. But if they bet that the markets would rise, then the opposite would be true.

 

Managing the Risk

Spread betting is a type of leveraged bet, so you can potentially lose far more than your original stake, depending on how badly you get it wrong. The best way to minimize your risk exposure is to limit the size of your original stake. If you keep your stake low, your losses won’t be as bad if the market moves against you.

You can also implement a ‘stop loss’ account. This places a hard limit on how much you lose on any financial spread bet you make.

 

Is Financial Spread Betting Worthwhile?

It is possible to make significant winnings on financial spread betting. Profits from spread betting are not taxed in the same way as other financial investments but check tax law in your home country before you file a tax return.

Financial spread betting also allows you to speculate on a wide range of instruments without actually owning the underlying asset.

Spread betting is fun and can be profitable, but make sure you understand the finer details before you give it a go.

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