How To Spread Bet The Financial Markets
Spread betting is a strategy that allows you to speculate whether the price of an asset will fall or rise. You can use it to gamble on everything from commodities and shares to stock market indices and house prices. The good thing about spread betting is that you do not purchase an actual share or future contract. Instead you will make a bet according to the way you think the market you have chosen will move. In most case, you usually bet per penny or according to point movement in the underlying market. The amount you make as your bet is usually your stake. The amount can be as little as 1unit per point.
Since you did not make any physical sale or purchase, you are not liable for capital gain tax or stamp duty. To open your position, you re only required to put down a deposit, which is a small portion of the full value of your position.
How to spread bet
Usually, the spread betting firms will offer you a quote that consists of the bid price (selling) and a slightly higher offer price (buying). For example, if Financial Times Stock Exchange (FTSE) 100 stands at about 4800 the spread betting companies are likely to offer you a bid price of 4798 and an offer price at 4802. If you think that the price of the index will raise you can decide to purchase £10 per point at 4802. This means for each point of FTSE 100 rises you are going to get £10. Let say, the FTSE rises to 4852 by the day of close and you decide to close out your bet. This means that your profit will be (4852-4802 = 50x £10) giving you a total of £500. On the other hand, if you think that the market will fall, you will sell at 4798.
As in any betting, there are rewards and risk in spread betting. Although you can make a lot of money from wagering a small stake, it is also possible to lose a lot of money fast. For example if you decide to sell your FTSEE 100 for £10/point at 4798 and instead of falling it rises to 4820 you will lose (4798-4820 = -22x£10) =£220.
Since it is possible to lose a lot of money quickly if your trade goes wrong, most spread-betting firms usually demands some protection that you will eventually be able to settle. This deposit is referred as the margin. Although this varies in the amount, it is usually around 10 percent of your value bet. If you continue loosing and the loses threaten to exceed that margin, the spread betting company usually demand for more money ( margin call) if you do not have this money, the provider usually close your position at the current price.
If you depend on margin calls to control losses, you can lose a lot of money. Instead, you can use the stop losses. These are orders to close out a trade at your specified level. For example, if you sold your FTSE at 4798 and set a stop loss at an offer of 4805 your loss will only be (4798-4805 = -7x£10) = £70.
There are many reasons to consider spread betting. The most obvious reason is tax break as no taxes are applied on your betting profits. Additionally spread betting will let you speculate on wide ranges of markets that it would have been difficult to access.