What is Spread Betting?
Spread betting allows an investor to speculate on the movement of assets like company stock, pairs of currencies, or a stock index without having to own the asset itself. Currently, spread betting is only available in the UK and Ireland.
Spread betting is different from fixed-odds betting in that instead of a win/lose outcome, the degree to which your prediction is right or wrong determines how much your return or loss is.
When you spread bet on a financial instrument, you are speculating on the direction the price of the asset will move. If the price moves in the direction you predicted, your profit grows. On the other hand, if the price moves in the other direction, your loss will grow as the price difference increases.
Spread Betting and Investing Long-Same Exposure
There is a misconception that spread betting is riskier than traditional investing. To illustrate lets look at an example. Joe investor has researched company ABC and feels the stock has substantial upside so he decides to buy 2000 shares at $1 per share. Sue also agrees that ABC stock is an attractive investment and instead decides to buy 200 shares on margin with a spread bet. Sue’s provider offers margin accounts with a 10% leverage option.
If the share prices rises, both traders profit however, Sue’s return will be higher since she used margin and put up a fraction of the capital that Joe did.
On the downside, let’s assume the stock completely tanks and falls to zero from it’s $1 initial value. Both investors lose the same amount, $2,000, however, Sue would owe her broker $1,700 since she only put up $300 of her initial $2000 investment. This example does not take broker fees into account. When choosing the right spread betting broker, you will want to compare fees, platforms, and support offered.
Know Your Limits
Spread betting also allows the investor to “short” the market. Shorting a stock or investment means you are betting that the price will fall. In this scenario, your risk is potentially unlimited if the price continues to rise. Having the right exit strategy and taking advantage of the proper stop-loss orders can offer protection when the market moves in the opposite direction.
Reasons to Consider Spread Betting
- 24 Hour Markets – Some brokers offer 24 hour trading in certain markets.
- Small Margin Requirements – Spread betting uses leveraging, which means you are not required to put up the full value of your position. Leveraged investing is a technique that uses borrowed money to make your investing capital go farther, however if the market moves in the other direction, you risk more than your initial investment.
- Lots of Market Options – Depending on your broker, you may have access to lots of different markets such as commodities, stocks, forex, options, indices, or binaries.
As with any financial transaction it is important to understand the risks and costs involved and have the appropriate risk management strategy in place before making any trade.