Spread betting is an increasingly popular route for amateur traders looking to make big money, sometimes very quickly. This may sound like some kind of financial unicorn you should be looking to get involved with straight away, but it obviously isn’t as simple as all that. Whenever there is potential for big money to be made, there is almost always the same threat with respect to losses. This is particularly true when it comes to spread betting.
The beauty of spread betting, and perhaps its biggest danger, is that it really is very simple for you to get your head around in terms of the way it works. Its very name comes from the way that the “spread” covers the possible outcomes of your bet as represented by two prices, the higher “buy” price (or going long) and the lower “sell” price (or going short).
Spread betting is available on almost any market that you can think of and it is the way in which you bet on the price offered on the spread as being too low or too generous that makes it of particular interest to those traders who like the excitement that comes with betting on the most fluid markets and the possibilities of them going up or down. You would never make a traditional investment with the hope that the business or thing you invest in would lose value, but with spread betting you can do exactly that. The success of the bet depends on your prediction of the movement beating the spread, but this does not mean the price has to go up. Here down could also mean big money for you.
Aside from the relative simplicity and dynamism which make spread betting so popular, the fact that spread betting is what’s known as a “leveraged product” makes it even more enticing to those who love to take a risk. In layman’s terms this essentially means that you only need to make a small deposit to achieve much larger market exposure. This is where the possibility of big gains comes from, but it works equally true if your prediction is wrong and the price moves in the opposite direction to that which you bet on. For this reason it’s essential for you to have a risk strategy in place when approaching spread betting. This can be done by implementing what is called a “guaranteed stop loss” point at which you are comfortable cutting your losses and taking the hit before it gets any worse.
Another benefit of spread betting is that it has opened up markets to small traders which had previously only been accessible to registered brokers, such as foreign exchange trading. Forex is a perfect fit for spread betting due to the constant fluctuations that foreign currencies go through on a daily basis. The highly volatile nature of this market make it a potentially highly profitable one for those who are skilled at predicting movements and identifying which currencies are likely to surge up or drop down. This should be seen as red flag that amateurs should be cautious off rather than something to charge towards to, however, as only the most experienced and knowledgeable traders will usually come out on top
Spread betting is actually illegal in the US but it is a highly popular form of trading in the UK where all firms offering this kind of trading must be regulated by the FSA. This offers amateur traders security as if for any reason the firm you are dealing with goes under, losses of up to £50,000 should be covered by the Financial Services Compensation Scheme (FSCS).
Categories: Stock Market