Chapter 2. Why Spread Bet

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Financial spread betting is one of the fastest growing areas of financial trading, particularly in the UK where there are many spread betting companies with thousands of customers.

There are a number of reasons why financial spread betting has become the most popular form of financial betting in the UK. Spread betting offers several advantages over more traditional forms of financial investing and trading.

Wide range of markets with maximum flexibility

One of the major advantages of spread betting is that you have the opportunity to bet on a very wide range of financial assets or events. Spread betting enables you to speculate on whether the price movements of an asset will rise or fall.

You can find spread bets on everything, including:

Indices
These are collections of company shares, like the FTSE100, Dax, DJIA, Nasdaq 100 or sectors.

Individual company shares
There are thousands of companies with a share price that can be spread bet, including Apple, Amazon and Facebook.

Currencies
Where there is a currency being exchanged a spread bet can be struck. The popular currency pairs are Cable, EURUSD and USDJPY.

Commodities
The prices of commodities like oil, gold, timber, copper, silver, wheat can all be spread bet.

Interest rates and bonds
Interest rate futures like bund, bobl and long gilts can all be speculated on using spread bets.

Sports
The number of runs scored, yellow cards in a game and position in the league can all be spread bet.

Anything with a price
If it has a verifiable price, and spread bet providers think it’s popular enough to offer it, it can be spread bet. You can spread bet on property prices, political events, even e-sports.

This large amount of innovation in the industry means spread betters can look across the whole gamut of financial markets worldwide to find the best opportunities each and every trading day. Some spread betting companies registered in the UK offer betting on more than 20,000 financial instruments

Spread betting can open up for you the opportunity to trade faraway markets such as Australia and Hong Kong, markets you may not have previously had access to, just as easily as share trading local London stocks. And you can trade all these markets – including gold, oil, and bonds – from just a single trading account.

Spread bettors can also trade either side of the markets. It is just as easy to bet on the price of an asset going down – effectively, selling short – as it is to bet on it rising.

Many spread betting firms also offer the additional flexibility of being able to trade in smaller sizes than standard share or market contract sizes.

Open to small investors

Another major draw of spread betting is that it can be done with a very small amount of trading capital. This is due to the fact that with spread betting you don’t actually buy the underlying financial asset that you want to trade.

Instead, you simply take a trading position by entering a trade on a spread betting company trading platform that only requires a small margin deposit, speculating on whether the market price of the underlying asset will rise or fall.

The margin required to hold a spread betting trade is only a small amount of capital because spread betting is a highly leveraged product.

Did you know?
The margin required to place a spread bet can be very small. If you want to spread bet FX in the EU then you only need to put up 3.33% of the underlying asset. Indices is 5%. Company shares is 20% of the total value of the underlying asset.

This means, for example, that a spread bettor could hold a trading position equivalent to buying £1,000 of stock shares by only putting up a margin deposit of £200.

Opportunity for big profits

Because of the high leverage offered, spread betting offers traders with just a limited amount of money the opportunity to make potentially very large profits with just a small investment.

For Example
By putting up a 10% margin to place a spread bet would mean a change of only 2% in the underlying asset you’re betting on would give you a 20% return on your investment.

High amounts of leverage make for the ability to generate sizeable profits – substantially more than the amount of margin you put down to place your spread bet. However, traders need to keep in mind that leverage affects both profit or loss in equal measure.

While it is quite possible to make more money than your investment in a spread bet, if you’re wrong in the way you bet, you may end up losing money – even more money than your original deposit. It is possible to manage your potential losses with a stop-loss order.

The stop-loss order will automatically close out your bet if the market moves a specified amount against your spread bet position. Please ensure you understand the risks of spread betting before placing any trades.

Tax-free trading

Spread betting offers one huge advantage over other types of financial trading – it’s tax-free! Spread betting gains are not normally subject to either capital gains taxes or income taxes and are also free from stamp duty charges. These tax savings can substantially increase your net profits on spread betting.

Spread betting is tax-free because, unlike making a traditional investment such as purchasing stock shares, spread betting is simply a bet between the spread bettor and the company that offers spread betting. The only tax that applies to spread betting is a 3% betting tax which is charged to the spread betting company, and that is absorbed by the spreads.

Commission-free trading

There are no broker commissions charged in spread betting. All the costs are instead built into the bid-ask spread (also known as the point spread) offered to spread bettors. The buy price for a spread bettor is the ask price, and the selling price is the bid price. Tight spreads are to the trader’s advantage.

Not having to pay commissions getting in or out of trades is especially an advantage when one is frequently trading in small trade sizes, as most spread bettors do.

Tight spreads are to the trader’s advantage.
Thus, although traditional stock investing with commissions works fine for someone investing with a large account who wants to buy and hold long term rather than engage in short term day trading, spread betting can be more cost-effective for a trader looking to do multiple small trades per day or per week.

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No currency exchange risk

Trading in foreign stock shares, CFDs (contract for difference), or other financial instruments usually involves the additional risk of foreign currency exchange rates.

Did you know?
If your capital is in pounds sterling and trade CFDs of a stock traded on a US exchange, then fluctuations in the GBP/USD exchange rate can affect your profits. This is because you are trading a contract denominated in dollars.

In contrast, currency risk is not applicable to spread betting, which means that you can do all your trading – even spread betting on foreign financial instruments – in pounds per point, without ever having to worry about currency exchange rates.

With all the above advantages, you can create your own home business as a spread bettor, and – if you’re a good spread bettor – it can provide you all the income you want or need.

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