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Understanding Spread Betting

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It undeniable that spread betting comes with risks, and is not something to approach without caution, but it’s increase in popularity warrants a closer look. Requiring only a minimal starting amount in return for investment portfolio growth is cited as the reason more traders are dabbling in spread betting, however as it’s essentially a form of gambling there are risks involved which some argue outweigh the potential for profit. We’ll look at these both in detail.

Spread betting became popular after the financial meltdown of 2008. Following this, investors wanted to profit on the stock market but with the possibility to walk out if necessary. They found this in speculating the rise and fall in the market price of stocks, with the ability to gain profit on correct predictions. Thus, spread betting came to be what we know it as today. If you predict the market correctly, you can stand to make large profits – and quickly.

Spread betting allows you to speculate on the movement of a particular asset (for instance currency pair) without actually owning the asset. The trader speculates on whether they believe a particular market will rise, at which they buy (or ‘go long’). Should they be right in their predictions their profits will rise with any increase in value. Similarly, if they believe a market to fall they sell (or ‘go short), their profits will rise with any fall. The risk lies in the potential for . While you’re only required to put forward a relatively small deposit (due to it being a leveraged product), should the market go against your predictions you can stand to lose far more than your deposit, making it risky.

The positives and negatives of spread betting, in detail

With spread betting, traders are able to invest in Forex currency pairs, commodities, shares, indices or equities, as well as having access any market globally to speculate on prices. As well as these considerations the positives aspects of spread betting mainly fall to not having to invest initially a large deposit, alongside not having to actually own the asset. As already discussed spread betting is a leveraged product, and so allows you to open positions with a relatively small deposit (in relation to potential profit). This is helpful to those who may not have a large sum of money to start trading. However, this also contributes to the negatives, as it may tempt individuals who are not in a stable financial position to stomach a loss, particularly as you can stand to lose far more than you deposit. As well as this, being tax free (due to it being classed as a form of gambling) and small margins make it an initially more affordable style of trading. Although spread betting can be hugely profitable for some, due to the high risk factor it is far better suited to a seasoned trader who will be able to make rational and well informed bets, and can afford to make a loss if needed. This also applies to the possibility of an account close out, whereby should you not have sufficient funds in your account to cover a loss there is the risk that your positions will be closed automatically and you will lose any profit (alongside investment) you may have made.

How to approach spread betting

The most common reason behind people’s vulnerability to losing money in spread betting is down to them embarking on it naively without an in depth understanding of it or sufficient knowledge of their chosen market (or asset) prior to starting. It’s important to become fully acquainted with what items are on the market and what factors affect the fluctuation in prices. While may not own any assets in the market, you’re still required to learn how the stock market works and keep up to date with anything that could influence a rise or fall in price. One effective way to learn is to open a demo account, which are often offered for a trial period free of charge by reputable brokers, such as CMC Markets. It’s advisable to test your skills before you invest money in spread betting.

As previously mentioned there are approximately four different stock assets available to bet on, namely Indices, Commodities, Forex, and Equities. Though it’s possible to move from one asset market to another, it’s good to find where you feel at home. This means choosing a commodity that you’re comfortable to trade in, for instance either Forex pairs or Indices. This is likely to yield better success as you have to be conversant in all aspects of each asset to successfully trade in them, which means taking the time to study each asset and the various factors affecting its price changes. All assets behave differently in the market, and will become profitable at different times. So as a beginner, start with the assets you are comfortable in and that are easy to understand. Many people choose Forex pairs since they are a popular asset in the market and are easier to master. Start with placing small bets – particularly important for a beginner – and never bet more than you can afford to lose.

It is entirely possible to succeed at and profit greatly from spread betting, but only if you posses the necessary skills and have the relevant knowledge to accurately predict the rise and fall of the market.

Category: Investing

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