Your Quick Guide to the Mechanics of Spread Betting

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Spread betting is an interesting investment alternative available to novices and experienced professionals alike. During the actual spread bet, shares or futures contracts are not purchased. What traders do in a spread bet is simply place a wager on the direction of market movement for a chosen asset. The bet is made per point movement or per penny in the underlying market. The stake is the nominal amount that a trader wishes to bet. This figure can be as low as $1/£1/€1 per point. Information is key to spread betting success.

Options Available to Spread Bettors

Traders have two ‘investment’ options available to them including the following: a bet that the market will fall or a bet that the market will rise. Correct financial predictions yield a profit in the form of the betting stake x every point of market movement. Alternatively, losses can also be incurred if the market movement works against you. Losses are calculated by the betting stake multiplied by every point of movement against the trader.

There are many tools and resources available to traders to mitigate losses. These come in the form of an automatic stop-loss, which limits potential losses to a pre-agreed amount. This amount will be determined once a bet has been opened. It’s important for new traders to understand that automatic stop-loss is not a default security feature available to protect against negative market movements. Traders can for example opt for a guaranteed stop-loss by paying a premium at their preferred online brokerage.

There are inherent risks in spread betting, but these are limited to the position that that a trader takes. Risk of capital loss is always a possibility, so traders are advised to limit their investments to what they can afford to lose. Margin trading is a useful tool, but use of it opens the trader up to elevated losses if market movements work against you. It is important to understand the full risk/reward component to spread betting.

Benefits Available to Traders with Spread Betting

The literature on spread betting is vast, and the more newbies learn about it the more curious they become. Spread betting provides an opportunity for relative novices to immerse themselves in the financial markets and to generate healthy profits when the markets move in their favour. When profits accrue, there are several inherent benefits to spread betting. These include the fact that winnings in spread betting are regarded as gambling winnings. In the United Kingdom, all gambling winnings are tax exempt – for income tax and for capital gains tax purposes. This is one of the primary drivers of the burgeoning popularity of spread betting in the United Kingdom. There are many other benefits including the following: no commissions/fees, trade on margin, no stamp duty, easy alternative to stockbroking and a wide range of assets to choose from.

Tips for Effective Spread Betting Practices

If at all possible, newbie traders are encouraged to register with a spread betting platform that provides a demo account. The demo account will allow traders to practice spread betting strategies, methodologies and techniques online – without risking a cent of their bankroll. Multiple resources are available to traders in the form of user manuals, videos, webinars, guru guides and market commentary. Regulated spread betting and CFD trading providers are preferred, since traders can enjoy hassle-free deposits and easy withdrawals of their winnings.

 Author Bio:  Brett Chatz was born in Johannesburg, Gauteng, South Africa. He attended the internationally accredited University of South Africa, where he completed the prestigious Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. In concert with the primary degree, he completed several Bachelor of Arts courses, most notably English poetry and literature. In addition he enrolled at the University of Haifa in Israel to complete a post-graduate year in the Bachelor of Arts discipline.

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