The Top Spread Betting Tips for Online Traders
International marketplaces can be accessed in a matter of seconds and if the correct strategies are in place, an extra source of liquidity could very well be only a click away.
While many options exist for traders, one approach which has enjoyed a growing popularity in recent times involves spread betting. What are some of the fundamental principles behind this method? What are a handful of unique benefits? Are there any proven tips and tricks to employ along the way? These are some of the questions that will be examined in greater detail immediately below.
Spread Betting 101: A Look at the Basics
What exactly does the process of spread betting involve? Those who have any experience within the sports wagering community may already be familiar with the basic principles. Spread betting within the financial marketplace is associated with speculating on the price movement of a specific market or underlying security.
However, it should be stressed that spread bets can be used in both rising (bullish) and falling (bearish) market conditions. The main intention here is to predict the direction that the asset will move as opposed to simply turning a profit in the event that its value increases. The direction of the movement is the most important in this case.
As the name suggests, spread betting is associated with two prices of an underlying asset. These are known as the bid and ask prices. The difference between these two values is known as the “spread”. A trader will therefore try to determine whether a future value will be higher than the asking price or lower than the bid. Assuming that these predictions come to pass, a profit will be accrued.
Spread Betting and Margin Trades
Another interesting feature of spread betting is that the trader in question does not physically own the asset in question. Instead, he or she is simply concerned with price movements. This opens up a unique opportunity that is referred to as leveraging.
Traders will only need to deposit a relatively small position of the total value of the position (this is known as a margin). For instance, let us imagine that an asset is valued at £20,000 pounds and the margin requirement is seven per cent. In this case, the trader will only need to allocate £1,400 pounds in order to secure this position. The end result is that any subsequent gains (and potential losses) will be magnified in accordance with future price movements.
Note that margin trading can be a rather complicated strategy and it is wise to employ powerful online platforms in order to help ensure that nothing is left to chance. It could therefore be wise to try the best spread betting account in the UK to better appreciate how these types of trades are executed as well as the mechanics that are involved.
What Assets Does Spread Betting Apply To?
Although leverages are an important benefit of spread betting, there are other reasons why traders often employ this method. One involves the sheer number of assets and markets which can be accessed. Some may be surprised to learn that over 11,000 instruments are available, and these are allocated across a wide range of sectors. Examples include (but are not necessarily limited to):
- ETFs (exchange-traded funds)
- Currency pairs (Forex trades)
Simply stated, there is indeed something here for everyone’s portfolio
Benefits and risks of Spread Betting?
We have already mentioned the principle of margin trading as well as highlighted the variety of assets and instruments that can be accessed via spread betting. Increasing the leverage to aim for higher profits will automatically increase your exposure to higher risks. However, there are additional benefits to appreciate in order to better understand the big picture. Let’s quickly list some pertinent examples.
Tax Advantages in the UK
Note that this first benefit can sometimes depend upon the physical location of the trader. However, spread betting is considered to be a form of gambling within some jurisdictions. Any profits may therefore be taxed as winnings as opposed to income or traditional capital gains.
The Ability to Go Long or Short
Placing a bet upon both rising and falling prices is yet another powerful windfall. Traditional ments (such as blue-chip stocks) may suffer in the event that bearish market conditions emerge. Traders could thereafter lose a significant amount of money or be forced to hold a position for a long period of time. Spread bettors can speculate on both rising and falling markets; offering the ability to turn a profit even during uncertain economic conditions.
The majority of trades are subject to commissions and fees that are levied by a brokerage firm. This is not the case when referring to spread betting. On the contrary, the commissions have already been factored into the spreads themselves. It is therefore much easier to calculate profit/loss margins. Traders can keep a close eye on their trading costs in order to better determine the most appropriate position. Please note that other fees and charges apply.
A final advantage of spread betting involves the concept of hedging. Hedging is essentially a strategy intended to offset portfolio losses that might otherwise occur as the result of one or more devalued assets. Let us take a look at an example.
Imagine that a trader is heavily involved in the banking sector. However, recent economic news seems to signal a downturn within this marketplace. Any losses that might occur in regard to individual holdings could be mitigated by opening up a spread betting position and predicting that asset values will decrease. In other words, the profits accrued by such a spread bet can be used to counteract any losses that could harm an existing portfolio.
Professional Risk Management Strategies to Increase Returns
So, what strategies will experienced spread betters employ? Perhaps the most important involves adopting a proactive stance in order to appreciate real-time price movements. This will enable individuals to make snap decisions so that they can take advantage of sudden changes when warranted.
It is also wise to monitor benchmark indices to better appreciate large-scale price movements (as well as the state of the economy as a whole). For instance why would you trade the US 30? As this index tracks the prices of 30 major companies (such as Apple, Microsoft and Coca-Cola), it can be utilised as a fiscal “barometer”. Such an approach is even more relevant in the event that traders are keen to open positions associated with blue-chip holdings.
A final approach involves what is known as trend trading. In this case, a trader will closely monitor medium-term market movements. The intention here is to better predict when the price of an asset is expected to rise or fall. It is then easier to know when to open or close a specific position. Candlestick charts and moving averages are often analysed in detail to better appreciate such predominant trends.
Similar to any type of trading strategy, a certain degree of high risk is associated with spread betting. As opposed to entirely eliminating risk, the key is to mitigate its overall effects. There are several ways in which this can be accomplished.
Guaranteed Stop-Loss Orders
While this method can sometimes incur a slight fee, many traders feel that it is worth the extra charge. Guaranteed stop-loss order ensure that a position will be closed at the exact value set by the trader; regardless of the current market climate. This can help to stem substantial losses that might otherwise occur.
Standard Stop-Loss Orders
Standard stop-loss orders are slightly different, as they freeze an existing trade at the best price in the event that the stop value has been exceeded. The only potential downside here is that there can be instances when the associated value is lower than the trigger itself. This may result in a loss; especially during times when the markets are particularly volatile.
Cutting-Edge Solutions for Modern Times
In truth, spread betting represents both an art form and a science. There are many unique advantages associated with this approach and in the same respect, a handful of possible risks should also be recognised.
The final piece of this puzzle involves choosing a reputable and transparent trading platform that can offer potent trading solutions. Whether you have recently entered into the world of online trading or you wish to develop a more diversified portfolio, there is no doubt that spread betting is worth a closer look. Feel free to perform additional research or to speak with a professional in order to address any additional questions that you may have.
*Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
*Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.