Financial spread betting was first conceptualized in the 1970s and it gives retail clients an opportunity to place leveraged trades on global markets.  One of the main attractions of spread betting is that it allows investors to short the market, e.g. place a trade against the market believing it will go lower.

Spread betting is a relatively simple concept. If you think the market will go higher you can ‘buy’ on the offer, or you can ‘sell’ on the bid believing the market will go lower. Spread betting firms make some of their profits from the difference, called the ‘spread’, between these two prices.

We dont have spread betting here in the United States, but its very popular in the UK and Europe.

How Spread Betting Works

With spread betting, you are betting on each point movement in the market. You can think of your stake size as a multiplier as this is how much you are risking on each point movement.

For example, if I was to buy £10 a point of shares with a spread of £0.99 £1.01 I would buy at the offer price of £1.01. This means I am speculating that the shares are going to increase above £1.01. If later in the day the spread was £1.21 £1.23 and I wanted to close my position, I would close my position based on the bid price, £1.21. In this scenario I would have made (£1.21 £1.01) x £10= £200. If the market went lower and ended at 90p-91p I would have lost (£0.90 -£1.01) x £10= £110.

Time Frames for Spread Betting

Spread betting is suitable for long term and short term traders. Day-traders can make use of the daily prices with lower dealing costs (although rolling charges are applied if you hold these positions overnight) or you can use the wider future spreads (with no rolling charges) if you want to hold these positions for a longer period of time.

Managing Risk When Spread Betting

Managing your own investments carries its own risks, however, but spread betting firms give you a wide range of tools to assist your trading. You can monitor your positions by calling the dealers, on their online platforms or, with most firms, on your mobile. Some firms even offer automated text and email alerts. You can also place stop and limit orders to take your profits automatically, or to close your positions.

You should note that if you place a stop loss on your position, the market can gap through the stop price if the order cannot be filled quickly enough. However, spread betting firms will offer you a guaranteed stop for a small premium which insures your position against this rare occurrence.

The Advantages of Spread Betting

In the UK, spread betting has several key advantages compared to trading with traditional methods. For example, spread betting is capital gains tax and stamp duty exempt, although this could always change in the future. It gives you leveraged access to the markets, allowing you to make more from your money (but also lose more). It also gives you easy access to trading shares, indices, FX, commodities, ETFs etc. all from one platform.

As spread betting is leveraged, you need to make sure you know how much you are risking as you can lose more than the money in your account. If you are risk-sensitive make sure you make good use of stop losses.

This article was written by Spreadex; an established Britain-based company that offers live spread betting .