What Is Spread Betting? Is Spread Betting Bad? Examples & How To Place
Another way you can get into the forex market without actually investing in the stocks is through spread betting. It's a way in which you determine the journey of a stock without actually investing in it. It means you're not purchasing or selling the stock, you're just determining whether it will rise or fall over some time without having any particular interest in this stock or security. Do you get the idea now? This article will tell you all you need to know about spread betting, how exactly spread betting works, and some tips on how to bet better on spread prices.
What Is Spread Betting?
When we say spread betting, what we're referring to is determining the direction of a financial market without necessarily owning the stock. This often involves the spread betting company laying down two prices. When you put out a stock, there's usually the bid and the ask price. The difference between these prices is called the spread and this is what betters are focused on. Their goal is to determine whether the price of the underlying stock would be higher than the bid or lower than the ask price. Once they determine this, the next thing is to, well, bet on it. Notice how it isn't necessary they purchase this particular stock before they can bet on it. The spread better does not own the stocks they're betting on, they're just there to determine the trajectory of the stock.
At this point, we must mention that there shouldn't be any kind of confusion between spread betting and spread trading. Spread trading is basically when an investor takes two positions on a trade and profits from the underlying securities if there's a wide or narrow spread. In other words, spread betting is an effective method cost-wise to speculate in the forex market. Oh, and it's also tax-free
A Stock Market Trade Versus A Spread Bet
There are subtle and distinct differences between the purchase and selling of stock and spread betting. A few of the differences would be examined below.
2. For spread betting, there are often expiry dates. This means a specific time is set for you to bet. The goal is to predict the trajectory of stock at a fixed time. This means you have to make sure you predict a goal you think a stock is likely to reach at the fixed time. Stock trading on the other hand has no fixed expiry date.
1. For spread betting, you don't have to pay taxes. It is completely tax-free as you're not exactly buying shares of stock.
3. The strategy for spread betting is simple. You either buy or sell. This means you can either go long or short. For stock trading, on the other hand, it can get a little complicated. You have to buy and hold shares for an extended period before you decide to sell or not. In other words, a spread bet is short-term while a stock trade takes more time.
4. Talking about costs, if you're going to spread bet, there is a form of deposit. You have to make some sort of payment as a form of stake. For stock trading, however, you buy the entire shares upfront.
5. Last but not least, the ownership of securities doesn't go to a spread better who is simply determining the direction of a stock. Unlike a stock trader, a spread better does not have any kind of underlying interest in the stock he's betting on.
Point Spread Examples, Main Features, How It Works
You've been reading about spread betting for a while now and you probably don't even know how it works yet. This section is going to give you some examples and analyze them.
2 x 102 = $204
5% of $204 = $10.20,
So we're clear on that, yeah?
As regards how spread betting works and its main features, there are a few things you need to know. As said earlier, you need to deposit so you can get the full market exposure on the stock. This is known as leverage. If you're going to buy a stock, you're going to put down the money for all the stocks but if you're going to bet on it, you only have to put down a specific amount to gain leverage. This amount is known as the margin. Margins in this case are split into two. The initial margin rate you deposit so you can open up your buy position and the maintenance margin for losses. If your predictions aren't correct and your account starts raking up losses, you have to pay and cover those losses. The additional payment is the maintenance margin. Going back to the examples above, since you only paid $10.20 to start your bet and you lost, you're going to cover up your loss and pay extra.
There are three main features of spread betting. The spread, the bet size, and the duration.
- The spread is the margin rate. It's the money you deposit to open up a buy position and start the bet.
- The bet size is exactly how much you want to pay per point. This is what would determine your profits if your prediction was correct and your losses if it was in the negative, rather.
- Lastly, the duration is the fixed time as to how long the bet would last altogether.
Currency Spread Betting Strategies
When it comes to spread betting, there are a lot of strategies that can be applied to determine the prediction of a stock. Not only that but there are also some of these strategies that work well for betting on short-term trading. For example, trend following is a great strategy in spread betting. Look at it this way, most people are also using the trend line strategies to determine where and when to open and close a trade. It's not a bad idea to use it as a betting strategy too. News trading is also an effective strategy in spread betting. Other strategies include forex scalping (when investors who in this instance are called scalpers, buy and hold a position for just a couple of seconds or minutes and then sell the stock. This process is repeated throughout the day as it's a way for investors to gain regular profits using the fluctuating prices to their advantage) and hedging forex (opening multiple trades at once to reduce the chances of running currency and exposure risk)
Forex Spread Betting Tips
- Make sure you have a trading plan in place before betting. This would enable you to know when to open and close a trade
- Set up some risk management precautions. To go back to the example we set earlier, you don't necessarily have to wait for the price to move down 52/54 before closing the trade. Once you realize the stock is moving down, you can quickly close the trade. An example of a risk management tool is a stop-loss order. What it does is that it closes out your position automatically when it hits a specified amount. It's a good way to cut your losses and maximize your profits.
If you're going to go into spread betting, you have to be adequately sure. There's a lot of profit that can be made if done right and if otherwise, you have to make sure you have a risk management process in place that reduces your losses so you can recover from them.