Considered as a type of derivative trading, spread betting is a popular form of derivatives based trading that involves analyzing the future financial markets. With this trading, you place your bets based on the nature of the future financial market. Thus, your decision will be guided by the behavior of the future market. So, if you want to invest in spread betting, get the basics right. The following guide contains all things spread betting—including the benefits and features.
Spread betting is a betting strategy that involves analyzing the future financial market price. This may include forex, indices, and shares. In the United Kingdom and Ireland, spreads betting is tax-free—provided that the investor doesn’t take the investor doesn’t commit to owning the asset. However, if you are based outside the UK, the rules regarding spread betting may vary. They may also depend on the explicit prevailing circumstances.
How Spread Betting Works
An investor should track the asset value so that he/she can have a clear picture regarding the future market behavior. However, the owner is not allowed to make asset ownership. Here are a few things you should know about spread betting:
- The short & long spread trading
Long, Short Spread Trading
Long trading is a situation where you place a trade because you anticipate that the price will increase in the future. This strategy is guided by a certain time frame. On the other hand, going short or simply shortening a market is placing your bets because you anticipate that the market price will decline in the future.
The purpose of spread betting is to enable you to speculate the nature of the market in the future—i.e. rise or fall. Consider a situation where the price is projected to decline. In this case, it’s prudent to consider opening a spread and sell your trade at the underlying market. Here, the amount you lose or gain will be dependent on the correctness of your prediction. For instance, if the market price declines, you would profit from your spread bet. On the other hand, if the gold increase, you will make a loss in your position.
On the other hand, leverage is spread betting is designed to help you gain a good exposure when it comes to the full market. This is done based on a fraction or percentage of the current market cost.
Leverage helps magnify profits and losses. This is because these two components are calculated based on the value of your position. They don’t depend on the initial deposit you make. For better exposure management, it’s important to have an elaborate risk management strategy.
Margin and Spread Betting
Spread betting involves putting down a certain small initial deposit. That’s why experts refer to leveraging trading as trading on margin. Margin in spread betting is divided into two. They include:
- Deposit margin
- Maintenance margin
The deposit margin is the initial finding that is needed for opening the position. This margin is usually quoted as a percentage of the total trade.
Maintenance margin refers to the extra funds that are needed when the position sinks into losses that aren’t centered on the initial deposit. Here, you will receive a notification (also referred to as margin cell). This notification will allow you to add funds or watch your position as it closes down.
Spread Betting Features
Spread betting enables you to predict the future market before investing your money. In spread betting, you minimize the risks of losing your money. Plus, it enables you to have better control over your trading activities. This trading strategy comes with 3 main features. They include:
- The spread
- The bet size
- The bet duration
Below is a quick overview of these three main features.
Define the Term Spread
Defined as the difference that exists between the buy and the current selling prices, the spread is usually wrapped around the current market price. In most cases, the spread is also referred to as the offer. It can also be known as the bid. Any given trade is usually factored in based on these 2 prices.
Consider This Example
Consider an FTSE 100. If it trades at 5885.5. If the trade comes with a single point trade, the offer and bid prices will be 5886 and 5885 respectively.
In simple terms, a bet size can be defined as the amount an investor bets per any unit movement of the current market price. You have the freedom to choose your explicit bet size. However, you should meet the requirement recognized by the company. To get a profit or loss, they will subtract the opening price from the closing price. They will then multiply the figure by the bet value.
The price movements are measured to get the points in the underlying market. Here, a point of movement may denote a penny, hundreds of dollars, etc. Thus, it’s important to understand what point means when it comes to the chosen market on your deal ticket.
Consider This Example
Suppose you open a $3 per point. Assume that the FTSE is 1000 and it moves 70 points in the favor of the trader (i.e. you). The profit from this trade will be $120($3 x 70). On the other hand, if the points move against you, you will lose around $120. This is what is spread betting is all about.
Any bet position should expire. In most cases, they should expire within a certain time frame—also known as the bet duration. It’s important to note that any spread bet should have a timescale, which is always fixed. This timescale can range from days to months. You are allowed to close your spread bet before the expiry date.
If you want to get the most out of spread betting, get the facts right. With spread betting, things like forex, indices, and shares can be easily predicted. The above guide will help you understand what’s spread betting and how you can leverage it to make a lot of money.