We talk about spread betting quite a bit here at Trading College, but if you’re new to trading you may ask “what is spread betting”? There are some great benefits to spread betting, and it can be a very profitable way of trading foreign exchange, commodities, stocks and cryptos markets. Read on to find out more about what spread betting involves and if it’s right for you.
What is spread betting?
Put simply, spread betting is a derivative that allows you to speculate on whether the markets are going to rise or fall, without having to buy the underlying asset. If the market moves the way you predict, your profit will grow – and keep growing – the further it moves in that direction. However, if the market moves against you, your loss will also increase the further the price moves in that direction. This ability to trade in either direction provides a much wider range of trading opportunities than traditional buy-and-hold investment.
There are three components to financial spread betting you must be aware of:
Spread betting gets its name from the spread. This is the charge you pay to open your position, which will be one of two prices (known as the offer and the bid) that are wrapped around the underlying market price. The costs of any given trade are factored into these two prices, so you will always buy slightly higher than the market price and sell slightly below it.
For example, let’s say you wanted to spread bet the FTSE 100 which is trading at 6825.5 with a one-point spread. The offer price will be 6826 and the bid price will be 6825.
The bet size
The bet size is the amount you bet per unit of movement of the underlying market, therefore determining the size of your profit or your loss. You’re able to choose your bet size, but it must meet the minimum bet size your broker will accept for the market chosen. The difference between the opening price and the closing price of the market, multiplied by the value of your bet will determine your profit or loss. Let’s take our FTSE 100 example from earlier. You open a £2 a point bet on the FTSE 100 which then moves 60 points in your favour. £2 x 60 points = £120. You’ve just made a £120 profit from that spread bet! However, if the FTSE 100 had moved in the other direction, therefore against you, you’d be down £120.
The bet duration
As it sounds, this dictates how long your position remains open before expiring. All spread bets have a fixed timescale which can range from a day to several months. You can, however, close them at any point before the designated expiration, assuming the spread bet is open for trading. You could open a trade that is called a daily funded bet which rolls over everyday as long as you keep the trade open, or you can place a trade that expires at a business quarter, i.e. March, June, September or December.
Benefits of spread betting
Spread betting is a particularly popular way of trading amongst retail investors for several reasons.
1. Tax free profits
Yes, you read that right. In the UK, spread betting is tax-free! This means that whatever profits you make from spread betting are 100% yours to keep. This is one of the key differences between spread bets and CFDs, and one of the reasons our students love spread betting.
2. Trade in either direction
Spread betting allows you to take advantage of markets that are both increasing in price and declining in price. If you believe a market is going to rise in price you would open a ‘long’ position. If you believe a market is going to fall in price you would ‘go short’ that market. This widens your trading opportunities as you can spread bet the market in either direction. For example, when the coronavirus hit the news lots of our students predicted the markets around the world would fall, and they were right. They made a nice return.
3. Wide range of markets
Spread betting offers access to a wider range of markets to trade than traditional forms of investing. You can trade anything from the forex market, to indices, shares, commodities, bonds and ETFs.
4. Small initial deposit
To enter a trade, you only need a small initial deposit, called a margin. This can magnify your profits because you’re able to open a position that is much larger than your initial deposit.
5. Round the clock trading
Trading hours vary by market and usually you can only trade these markets during the set hours. Not only can you spread bet during regular trading hours, but some spread betting providers actually allow you to trade certain markets outside of market opening hours. You can now trade at the weekends.
6. No commission
The cost of opening your position is covered in the spread, therefore omitting any commission fees required when spread betting.
What is margin in spread betting?
Think of the margin in spread betting as the deposit you pay to enter the trade. You are not buying the asset; therefore, you don’t need to pay the full value of the trade. The deposit required is usually represented as a percentage of your total trade and will vary depending on what you’re trading. For example, you decide to place a spread bet with a total exposure of £10,000. If the trade requires a 10% initial margin rate, you need to have a minimum of £1,000 in your spread betting account to open the trade.
Remember, this is a deposit so whilst you only need to have £1,000 in your account, you are still exposed to the full £10,000 value of the trade. If the trade moves in the direction you speculated, then you can exit the trade with a nice profit. If the trade moves against you, you run the risk of losing more than your initial £1,000 deposit, so remember to set your stop-loss!
Managing your risk
As with all types of trading, you must have an appropriate risk management strategy in order to minimise your losses. Remember to only risk as much as you can afford. It would be nice if we could go into a trade knowing 100% that it’s going to go in the direction we think it will. Unfortunately, this is not always the case. Not every trade will be a winning trade, and the best way to deal with this is to be prepared. There are a few ways you can do this:
Find the 1:2 risk-reward ratio
Some traders will risk up to 3% of their trading account. We don’t recommend this. Aim to risk no more than 1% of your trading account. This will ensure you’re trading within sensible risk parameters whilst learning to trade. So, if your trading account is £10,000, you’ll risk no more than £100 (1%) on a trade.
We’re looking for a minimum 1:2 risk-reward ratio. That’s risking 1 to gain 2. By doing this you’ll only need 33% winning trades to break even, which is possible with the right strategy and mindset, which we teach our students. If you’re making 80% winning trades with a 1:2 risk-reward then your account is going to grow at a nice rate.
Stick to your trading plan
Every successful trader has a trading plan. It is essential to ensuring you don’t let your emotions get the better of you and helps you stay on track with achieving your goals. Traders who don’t use a trading plan can lose direction and focus, get distracted, over-trade and won’t have the benefit of learning from analysis of their actions. Recording your results is vital for understanding your progress.
Set your stop-losses
Setting a stop-loss order reduces your risk by automatically closing out a losing trade once a market passes a set price level. There are two different types of stop-loss you can use:
● Standard stop-loss order
This order will close out your trade at the best available price once the set stop value has been reached. It is possible, however, that your trade will be closed out at a worse level than that of the stop trigger, especially in highly volatile markets.
● Guaranteed stop-loss order
This order guarantees to close your trade at the exact value that you set, regardless of underlying market conditions. The downside to this type of stop-loss order is that it will typically incur an additional charge from your broker.
Use your tools
Imagine looking at a chart and being able to see where you should enter or exit a trade. We developed the Trend Predictor to do just this. It’s a handy tool our coaches and students use that signals which way the market is going to go on the next candlestick, whether up or down. A green arrow indicates the next candlestick will go up. A red arrow indicates the next candlestick will do down. Simple! Check out this webinar that explains more about how the Trend Predictor works and how you can get it.
We’ve said it before and we’ll say it again; anyone can trade. What determines the success rate of a trader is their understanding of the markets and the tools and strategies they use. Whether you’re completely new to trading or you’re not seeing the results you want, we have a range of courses for different levels to help you reach your trading goals. You can see our courses here or call us in the office to find out more.
Ready to start spread betting? You can open a spread betting account with IG here.
Take the First Step Toward Your New Trading Career
Lee is qualified at The Society of Technical Analysts, having passed his MSTA and CFTe with flying colours. To see Lee and our coaches use technical analysis, you can access our Live Trading Room 5 days a week. If you’re looking to step into the world of online trading, we’d like to help. We offer both courses and mentoring opportunities to help you trade with skill and confidence. Come along to our free Learn to Trade Live one-day course to really get your foot in the door! See here for more details and to find a date near you. Registration is now open for our Pro-Trader Programme! Join now and find financial freedom.
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