Spread betting is a unique method of investing some of your money in the price movement of a specific market such as shares, indices or Forex without actually having to own the particular asset. With spread betting, all you do is to predict the outcome, and how correct or wrong you are determines the profit or loss size.

The company that is offering the currency spread betting typically quotes two prices, the ask price, and the bid price. The spread is the difference between the buy and sell price.

How it Works

When spread betting, what you are actually speculating on is the financial instrument price direction or movement. If the price moves as you had predicted, your profit grows the further away it moves. However, in case the market moves counter to your prediction, your loss also increases as the movement becomes greater. When you bet on the price increase, this is known as going long. Betting on a decrease is referred to as shorting or going short.

When participating in spread betting, the trader doesn’t sell or buy the underlying asset such as a physical commodity or share. Instead, all you do is place a bet whether you are expecting the product price to go up or down. If you are expecting the value to rise, you would be opening a long position (or buy position). On the other hand, if you are expecting the value of a commodity or share to fall, you would be taking a short position (or sell position).

Being a margined or leveraged product, spread betting only requires that you only deposit a small fraction of the full position value. This implies that your profits potential (or losses) from your initial capital investment is considerably higher compared to traditional trading. The required margin is normally from 1% to 10% of the total position value, depending on the particular market.

With spread betting, not only can you take a position on endless individual currencies, indices, and shares around the world, but you can also place trades on bonds, different commodities, and interest rates through established trading platforms like CMC Markets.

What is or Leverage or Margin?

As aforementioned, spread betting is typically a leveraged product, meaning you are only required to deposit a small fraction of the full spread bet value in order to open what is termed a ‘trading on margin’ position. While leveraged/margined trading makes it possible to magnify your returns, it also works the other way. Losses get magnified, being dependent on the full position value and you could end up losing more than your initial deposit.

Spread betting’s main advantage compared to conventional trading methods is that it allows you to trade on both falling and rising markets. Effectively, this gives you the opportunity of making a profit irrespective of whether the market you are trading is going down or up. Spread betting is among the few forms of trading that allows the trader to profit from market prices that are falling.

Increased leverage makes it possible to have under your control large currencies holding with minimal money up front. If, for example, you are having 100:1 leverage, it’s possible to control $100,000 with as small an amounts as $1,000 in your trading account. Effectively, it implies that you can get all of the profits accruing on a $100,000 market position while you are actually only risking a token $1,000 of your own funds.

Spread betting financial trading is flexible because it gives you the chance of taking short positions and at the same time deal in over 10,000 markets. It is important, however, to understand the kinds of risks that are involved in spread betting and put in place appropriate risk management strategies.

Bottom Line

If you are already actively trading on the markets, spread betting is an excellent alternative method of taking advantage of the asset or commodity price movements, without necessarily having to buy any of the underlying assets. You can speculate on everything from commodities and shares to stock market indices. Spread betting allows you to gamble on whether the asset price will fall or rise.

It’s, however, a good idea that you stay updated with current news and global affairs as real-world events tend to have major impacts on market prices. The Yen, for example, has since the surprise election victory of Donald Trump fallen as much as 10%, by virtue of the election pledges he made during the campaign.

 

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George Meszaros is the editor and co-founder of Success Harbor where entrepreneurs learn about building successful companies. Success Harbor is dedicated to document the entrepreneurial journey through interviews, original research, and unique content. George Meszaros is also co-founder of Webene, a web design and digital marketing agency.