Spread betting has emerged as a unique way to trade in the financial markets, allowing investors to speculate on the movement of diverse assets. It is increasingly popular in diverse countries, especially where profits are exempt from capital gains tax. But how does spread betting work, and what strategy can be implemented?
Understanding Spread Betting
Spread betting is a form of trading where you speculate on the direction of the price movement of a particular asset, whether it’s stocks, currencies, commodities, or indices. Rather than directly buying the asset, you will essentially bet on whether its price will go up or down.
Your profit or loss will be directly related to the number of price points the asset moves instead of the asset itself. Spread betting often uses leverage, allowing you to control a large position with relatively little capital. This can increase profit, but it can also amplify the potential losses.
The core concept of spread betting is to predict whether the price of an asset will increase or decrease. The spread refers to the difference between the buy price (ask) and the sell price (bid) set by the broker, and this represents the profit margin.
Your profit or loss will be calculated based on the number of price points that the asset moves and then multiplied by your stake per point. So, if you believe that the price will rise, you buy the token. This means you will ‘go long.’ On the other hand, if you ‘go short’ and think the price will fall, you are selling.
Spread betting has become very popular among investors, but there are some important considerations. Due to leverage, spread betting attracts a lot of risk. If you lose, the amount might exceed your initial deposit. Also, price fluctuations will significantly affect your profit or loss.
Why Spread Betting Appeals to Today’s Savvy Investors
1. Flexibility
One of the main benefits of spread betting is flexibility, as you can trade on a wide range of markets. These include stocks, commodities, forex, and indices, and you can go long or short. When you spread a bet, you can open a long position if you believe the market will rise and go short if you think it will fall in price.
2. Leverage
Spread betting amplifies your profit due to leverage. With a small initial deposit, you can get full exposure. For instance, if you want to bet on shares with $1000 and it has a margin rate of 20%, then you only need to put down $200. Although you only deposit $200, the profit and loss of your investment will be calculated using the full size of the position. So, if you lose your investment, you will lose more than your deposit.
3. No Ownership
With spread betting, savvy investors don’t have to own the asset. They track the underlying asset’s value, removing concerns about storage and ownership.
4. Risk Management
Spread betting platforms also feature risk management tools, including stop-loss and limit orders. This helps investors to manage their exposure.
5. 24/5 Market Access
Many spread betting platforms come with 24/5 market access, allowing investors to deal with the latest market movements and global events as they are happening. Since trading hours differ based on the market, investors always have access to an asset, as forex is open 24 hours a day, while shares and commodities trade when their exchange is open.
6. Access to Global Markets
Spread betting allows investors to access global markets, diversify their portfolios, and capitalise on international market trends. It also allows for investing in shares, currencies, commodities, and indices worldwide.
7. Tax Benefit
When you engage in spread betting, the profits are yours to keep. Unlike when you invest in shares, there is no capital gains tax on spread betting. Also, you don’t have to pay stamp duty since you don’t own the underlying asset.
Spread Betting in an Investment Strategy
Investors can implement different strategies when engaging in spread betting. One of these is technical analysis, which involves using historical data and information to predict the future movement of asset prices.
Technical analysis involves using stock charts, graphs, and past prices to predict the price for spread betting. They also use trend following, breakout trading, trend reversal, and momentum trading strategies for different asset classes.
Staying up to date with corporate moves can also be used in spread betting. For instance, if a stock declares a dividend, the stock price often increases in anticipation of the dividend payment. Investors can closely watch the companies’ annual general meetings (AGMs) to receive the latest dividend announcements.
Spread bettors can also choose highly sensitive assets to news and then place bets according to a plan. Look for news on a country’s central bank changing interest rates or a listed company waiting for important project bidding results.
The Evolution of Spread Betting
Spread betting has changed over the years and was originally a form of gambling. It originated in the UK in the 1970s as a form of sports betting. Bookmakers offer spread bets on sporting events, allowing gamblers to bet on the outcome of a match.
As the popularity of spread betting grew, bookmakers started offering bets on financial markets like commodity prices, stock indices, and interest rates from the 1980s to the 1990s. Spread betting became more popular when the UK government recognised it as a legitimate form of investment, exempting it from betting duty.
With the widespread adoption of online trading, spread betting is more accessible to diverse investors. Investors can trade on different markets, using advanced tools, analytics, and the latest news to inform their decisions.
Spread Betting as an Exciting Financial Tool
Spread betting comes with unique benefits for today’s savvy investors. High leverage makes spread betting even more attractive to investors, but it will also increase losses, making the implementation of risk management strategies extremely important. Still, spread betting benefits experts and new investors who want to try new skills and strategies.