Spread betting sounds so simple in concept. You bet on the directional movement of a market, and profit for every point you’re right. But ask any seasoned spread betting pro and they’ll tell you that the reality is usually much more complex.
Like any participation in financial markets, spread betting is as risky as it is potentially lucrative. Even with the best research and analysis skills in the world, you need to expect the unexpected when you step into the wild west of financial markets. Sure fire bets can reverse in the blink of an eye, and seemingly-impossible things can become realities – if you’re not prepared, you can expect a rough ride.
Your job with spread betting is to make sure you spot the opportunities that can yield results, while controlling the risks in every move you make, so your account profits on balance. But what exactly is spread betting, and what do you need to know as a beginner to succeed?
This spread betting guide for beginners aims to break down the basics of spread betting, to help traders of all levels of experience revisit the fundamentals of how this all works. While understanding spread betting mechanics, terminology and strategy is the first step, it takes good analytical skills, critical thinking and fast execution to be truly successful long-term.
Before starting with spread betting make sure you understand how it works and what benefits it offers to retail traders.
Placing your first spread bet can be an exciting and stressful experience. Find out how to place your first trade the right way.
With so many spread betting brokers on the market, it’s important to compare brokers and find the one that’s beginner-friendly.
Our aim in this comprehensive guide is to give you the basic tools you need to achieve that objective. While we can’t guarantee you’ll win, we can hopefully explain some of the foundations you need to find results spread betting on financial markets.
Beginners’ Guide – Essential Terms in Spread Betting
Understanding Spread Betting Concept
Spread betting is an adjacent way to trade on financial markets. Rather than buying instruments like shares or derivatives, with spread betting you’re simply betting on the movements in the market. Similar to a football fan betting on the World Cup Final, you’re betting on how the markets will perform, rather than actually taking a position in any of those markets.
Say you’re betting on the price of Apple shares. Rather than buying Apple shares yourself to back the company, you can ‘buy’ Apple with your spread betting broker. There’s no tax to pay on this transaction with spread betting (unlike acquiring and disposing of Apple shares, which could be liable to capital gains tax), and there’s no waiting around for market liquidity. Instead, you buy the top end of the quoted spread, and you’re in the position.
Spread betting works by applying your stake per point – so if you’re betting £1 per point and your position gains 10 points, you’re up £10. If your position loses 7 points, you’re down £7. The only other factor to consider here is the spread – the difference between the bid and offer price quoted by your broker.
This is representative of the profit margin the broker takes on every trade. So, if Apple shares are trading at £100, the spread might be £99-£101. This means you buy when the market is £101, even though the market in reality is sitting at £100. This is a £1 handicap going into this position, which pays the broker their commission.
The same is true on the sell side here. If you sell Apple at £99 because you think the market will fall, the shares need to drop at least £1 so you can break even. This is because sold positions need to be bought back to close out – so you’d need to buy the £99 position you took for £100 (current market price) if you closed out immediately.
While this is fairly easy to understand in practice, the difficulties with spread betting come from deciding which positions to trade, and in controlling your risk exposure when you do trade. The losses, as well as the gains, are unlimited.
Go Long or Go Short
Leverage
Wide Range of Markets
Who can Spread Bet?
Spread betting is most commonly associated with individual traders – people managing their own assets in search of a better return than what they’d get from a traditional fund or ISA. With tough economic and financial conditions, savings returns aren’t what they used to be. But through careful management of your capital, spread betting can be a lucrative way to increase your funds without the same complexities of other forms of investment.
Spread betting allows individuals to shoot for much greater returns – albeit with a substantially higher risk profile than other types of investment. This is active trading, rather than passive investment, and the success or failure of your strategy will depend on your execution. But even shooting at a 10% annualised return would far better most investment types, and is well within the bounds of reality given the leverage involved in spread betting positions.
Generally, investment funds consider spread betting too risky to be a mainstay of their portfolio, though it does feature in some instances as a marginal player for boosting returns. But for individuals who can be more agile in managing their own capital, it can be a highly effective tool for bettering the returns from other investment types.
Why Choose Spread Betting?
The main advantage of spread betting is leverage. Rather than trading markets pound for pound with the capital you have at your disposal, spread betting allows you to take significantly leveraged exposure to markets, where every single point in movement is worth 100% of your stake. Translated for individual traders, this means there are opportunities to make larger gains in shorter periods of time when you pick the right markets and the right directional movements.
A flexible, tax-efficient way to actively trade on financial markets, spread betting is becoming an increasingly useful tool for traders in a tight investment climate. While it’s not without its risks, it can be a good way to more effectively manage your capital for a more attractive yield.
Why Spread Bet?
Spread betting has an array of advantages over other types of investment and trading. It’s leveraged, not dependent on liquidity to the same extent as buying underlying instruments, tax-efficient in most cases and ultimately able to deliver a greater return than counterpart investment and trading styles.
If you’re looking to actively manage your capital for a better return, or you’re looking to capitalise on the benefits of quick, leveraged trading with the opportunity for substantial gains when markets move your way, spread betting can be an excellent tool for beginners to master.