Before answering the question of how does spread betting work, I will explain what spread betting is so that everyone can start on a level playing field.
Spread betting is simply speculating on the price movements of various tradable financial instruments without actually owning the actual asset. This type of trading is simply based on price movements.
Will the price go up or will it go down. The trader has to have a proper understanding of the asset he or she is trading or else it will simply be hoping rather than trading.
How Does Spread Betting Work?
The trader should first decide which asset he or she feels comfortable trading and apart from comfort they should also have an understanding of that particular asset.
The trader may be speculating on the German 30 (DAX), let us say the price at the moment is 9950 and the trader feels it has reached a strong support level and it is showing indication that it wants to higher to level that may provide proper resistance.
This level is 10000, the difference is 50 points, as it is spread betting is calculated as pound per point. The trader in this case will go long or buy in simpler terms.
He may decide to buy at 9950 for ten pounds a point. If the trade pans out well, the trader will make a profit of 10*50=500. That is quite a return from a small portion put into that particular trade.
This other scenario will depict the same trader going short or rather sell. When the price gets to 10000, the trader does an analysis and sees that price does not have enough strength to carry on with its upward momentum. He realizes at 9970 there is a support level that could probably hold price on its move lower.
So he decides to short the DAX at 10000 and hold it to 9970 the closest support area that price had created earlier.
The trader places the trade and holds it to 9970 to close the trade with thirty points if he had used the same ten pounds a point for the trade, he ends up making 10*30=300. This is pretty impressive too considering the amount of investment put on the trade.
Since this is trading and there is no telling where price will be headed next, there are instances your analysis will be wrong and you may end up making losing on a position. That is why many traders who have learnt the importance of risk management have put into use the stop loss order.
This is a price limit put on before hand to close the trade if price pushes that far against them. This type of order limits losses and ensures you are going to be able to have your account stay alive to trade another day.
Although the stop loss order is helpful, it is also at times rendered useless if the price gaps against your trade and does not fill the stop loss order at the desired price point.
Spread Betting Advantages
Spread betting has various advantages over other types of trading. This is why many people find it lucrative and enticing to trade. The following are some of the reasons why:
- Spread betting is not subject to taxation, this is because spread betting is considered gambling and all brokers providing this service are regulated by the Gambling Commission. Profits made from gambling are not legible for capital gains, so all your profits stay as so.
- Since spread betting is a highly leveraged service, this means the margin requirements for a spread betting account are quite low too. The small margins with high leverage can enable a trader who is highly skilled to make a massive return without risking much. Although the leverage is a positive addition to trading it is also as dangerous, since your losses will also be matched by the leverage to have in place. That might mean having your margin wiped out completely.
- There is a wide range of assets to choose from, this is the beauty of spread betting, you can trade anything as from indices, currency pairs, commodities, stocks and many more tradable instruments. With a wide array of instruments it is only wise to select which instruments suite you best. This will avoid you being confused by the many choices available. Some traders just decide to trade on currency pair out of the hundreds available, that way you will be able to master it well and make the best out of it.
- With spread betting you can make money as the markets go either way. You can trade long as prices move higher or you can trade short as price moves lower and still make profits out of that. This makes it very interesting, since you can spend your trading day going long and short a particular market and still make a killing.
- With a proper broker this type of trading can be a whole lot easier because of instant execution, because you are betting on price movement you will probably have a minor price difference in your entry compared to the price at market. All the same the execution is quite fast.
Spread betting is one of those trading methods that one can utilize to trade and boost his skills without having to put a whole lot on the line to make a winning trade.
With all the above stated advantages it is important to know that there are risks involved in trading no matter the trading method employed. As explained spread betting comes across as an easy money making avenue but all the same it requires time to learn how the markets work to be able to earn from them.
You could also be on the losing side and the fact is with leveraged products you may lose more than your account balance. So it is important to learn first then earn.