Looking for a Bit More Excitement in your Investing? Why not give Financial Spread Betting a Try
Not very long ago Forex trading was enough to get most investors hearts beating but it seems that some are now looking for a better way to get the old ticker beating faster and a rush of adrenalin coursing through the veins. Financial spread betting is a way for investors to speculate on the movement of shares, currencies and other indexes and its popularity is growing rapidly not just in the UK but all over the globe. Spread betting UK is a way to gamble on whether an asset’s price will rise or fall and can be undertaken on a range of different things such as shares and commodities, foreign currencies, stock market indices and even house prices. The good thing is that you don’t have to actually purchase the item you’re speculating on. You just look at the prices given by a spread betting provider and decide whether they’re likely to rise or fall. Seems pretty simple really but to help you if it’s something you’d like to try we hope to give you all the basic information needed to get you on your way.
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The Advantages of Spread Betting UK
Before we go too deeply into the ins and outs of this new form of investment let’s take a look at the advantages it offers:
- No stamp duty is payable
- Any profit you make is not currently subject to Capital Gains Tax
- The spread betting company doesn’t charge a direct commission or fee
- Profits can be made from both rises and falls in a particular market
- Trades are done on a margin which means you can work with the smallest of outlays
- Opening one account gives you access to a much larger range of financial markets
- Risks can be limited using a ‘Stop Loss”
- Bets can be placed for as little as 1p per point
And it’’s only fair for us to consider the disadvantages here too:
- You can lose a lot of money as some markets are very volatile. However you can keep loses to a minimum by putting a ‘stop loss’ in place
- It’s not really suitable for long term investors. Holding a bet over a long period of time will increase your costs so much so that it might have been better to actually buy the asset instead
- As a spread betting investor you have no rights e.g. no voting rights or dividends earned
Spread Betting Explained
Betting on the movement of an underlying instrument in the future is basically what spread betting involves. If you think the price of a currency, for example, is going to go up you place a buy bet and if you think it’s going to fall you place a sell bet. When trading in ordinary shares you only stand to make a profit if the price rises but with spread betting you can make a profit if you bet that it’s going to fall too.
How to Spread Bet
A spread betting company quotes two prices. A bid price and an offer price and the difference between the two is known as the spread. The bid price is the one that you can sell at and the offer price the one you can buy at. The movement of the prices is measured in points. For equities 1 point equals one pence and for indices 1 point equals one pound. A bet can be placed of any value against a movement in the point. For example £1 per point, £5 per point, £10 per point etc.
When you want to close a bet you simply place a bet in the opposite direction at the same rate. You close a buy bet by selling at the current quote and vice versa. The profit or loss that you make is the points difference between the opening and closing bet multiplied by the value of your bet per point.
Let’s give you an example to show you how to spread bet by looking at a simple index spread bet in relation to the FTSE index:
The FTSE 100 currently trades at 4500 and a company is quoting a spread of 4450 – 4550 on the daily FTSE.
Investor 1 firmly believes that the index is going to go up so places a bet at 4550 for £1 per point.
7 days later the FTSE has gone up and the daily FTSE spread is 4600 – 4650
Investor 1 thinks it’s time to place a sell bet at 4600 to close out their deal and makes a profit of £50 (50 points x £1).
If the opposite happens and the FTSE index falls making the current FTSE spread 4400 – 4440 Investor 1 decides to close out by putting in a sell bet at 4400 they’ve now made a loss of £150 (150 points x £1)
All other forms of spread betting follow this simple example.
How Does it Work when Spread Betting Forex?
In the forex market investments are made by trading one currency for another. A currency price is quoted in relation to its price in another currency. There is a base currency and a quote currency. For example, if it takes 1.5 Canadian dollars to buy 1 US dollar USD/CAD would be expressed as 1.5/1.The US dollar is the base currency and the Canadian dollar the counter or quote currency.
When spread betting forex you need to understand how the spread is calculated. There is always a bid and ask price when quoting forex. The bid price is the price at which the forex broker is willing to buy the base currency and exchange it for the counter currency. In our example it’s USD for CAD. On the other hand the ask price is the price at which the broker is willing to sell the base currency in exchange for the counter currency.
Forex prices are always quoted to 5 figures so let’s say for example the USD/CAD bid price is 150.00 and the ask price is 150.05. The spread therefore equals 0.05 or $0.0005.
Tips for FX Spread Betting
Let’s share some useful FX spread betting tips as it’s always good to get a bit of helpful advice whatever kind of investment you’re looking at making.
Keep a Close Eye on Your Speed
The forex market is extremely changeable from one minute to the next so consequently you could lose large volumes of money if you rush in and make the wrong decision. Keep your initial investment low to start off with and make full use of the brokers demo account before trading for real.
Understand Your Currency Pairs
When spread betting forex you’re betting on specific currency pairs. As opposed to spread betting with shares when you can bet on a wide range of different companies. Also in the forex markets you’re putting yourself up against professionals such as big banks in the biggest market in the world. You should get really familiar with the fluctuations of the currency pair you’re investing in and not put your eggs in too many baskets.
Stop Losses are Something you Should get Comfortable Using
Setting a stop loss means you pay your broker to limit any damage from a unsatisfactory forex trade. If you don’t put one in place you leave yourself wide open to substantial losses particularly if you’re a novice. You’ll be able to get out of a trade that is losing you money at a guaranteed rate if you put in place a guaranteed stop. It may mean that you’re eating into your profits by paying for a stop loss but it’s better than your profits taking a real battering.
Different Types of FX Spread Betting
Day Spread Bet Trader
This type of trader will trade multiple positions during the course of one day. Trades can last from minutes to hours and make profits from small changes in the market.
Short Term Spread Bet Trader
This type of spread betting trader will trade a few positions over the course on one week. Trades typically last from one day to one week. This type of trader is looking to make a profit from market moves of 1-5%.
Medium Term Spread Bet Trader
These involve a few trades over the course of one month and typically last between 2 weeks and a month. Profits are made from moves of between 5 and 10%.
Long Term Spread Bet Trader
This trader takes a few positions throughout a quarter and makes a profit from moves of 10% or more. Trades are made on technical levels and fundamental analysis.
We hope that we’ve been able to give you the basics of spread betting forex and other instruments and you feel a bit more confident to begin your spread betting journey. All that is left to say is good luck in your venture.
As with any form of investment it’s important to stay focused and not let your emotions carry you away.