Previously the domain of high rollers placing wagers worth huge sums, spread betting has grown into a highly popular way of playing the markets.
The UK has been the main driver of this surge, with accessible entry points allowing those who don’t have huge amounts of capital to invest – and perhaps don’t expect huge returns – can get the hang of trading and investing in a more accessible way.
If you’ve been looking at a spread betting platform and fancy a piece of the action, it’s worth doing some proper research first.
Here, we’ll look at the ins and outs of spread betting, as well as discuss a few strategies to implement in an attempt to maximise returns.
What is spread betting?
Fans of American sports may be familiar with hearing of people “beating the spread” when gambling on football, basketball or horse racing – and this is where the origins of spread betting in financial circles lie.
Stock market traders will be familiar with seeing assets listed with a buy price and a sell price. The difference between these two figures is the ‘spread’. The buy and sell prices are referred to as the ‘bid’ price and ‘ask’ price respectively in a spread bet.
If you believe the market will either rise or fall significantly, spread betting gives you the opportunity to seek a profit by placing a wager on which direction the market will move, rather than purchasing shares in an asset.
The benefits of spread betting
- More accessible: Initial capital for a spread bet is much lower than purchasing stocks and shares, meaning you can get involved with less cash.
- Tax-free: Spread-betting brokers profit from the spread itself, so you can place wagers commission-free and profits are also tax-free.
- Flexible: You can choose which position you take – short or long, it’s up to you. Purchasing shares ties you into needing a rise in value to profit.
The downsides of spread betting
- Magnified losses: If a market moves quickly, it can pile on your losses if it’s not in the direction you’d hoped. Stop loss orders can limit the damage here.
- Short-term: If you’re looking to build a portfolio to make long-term returns, this may not be the best method for you. It’s a one-off gamble on which way a market will move. Once it’s moved, you need to find a new one.
- No shareholder benefits: You won’t own any shares or stocks, so any benefits that may come with ownership are not applicable to you.
Tips for successful spread betting
Like any form of trading, success is not guaranteed with spread betting and, as we’ve previously mentioned, you could make a profit or loss.
However, as with anything in the markets, there are some ways in which you can try to tilt the balance of power in your own favour…
- Plan bets in advance: Don’t place wagers on a whim. Do your research into companies and keep your eye on current events. Pretty soon you’ll spot where opportunities typically lie.
- Practice, practice, practice: Most reputable trading platforms will offer you a demo account, where real money is not at stake. Get your eye in using this or practice new strategies here in case they are not successful.
- Bet the trend: Unless you have a good reason not to, betting with the trend can help to minimise your losses. Going against the grain is likely to be spectacular either way – win or lose!
Do you have any top tips for those looking to start their spread betting journey? Let us know in the comments section!