Many of you have probably heard of spread betting. Some of you probably don’t know too much about it. I’m a big believer in understanding the financial options that are available to you. So, let me tell you a little bit about spread betting.
Essentially, spread betting is a way to speculate on financial markets in the same way as trading a number of derivatives. When you place a spread bet, you aren’t so much buying a financial product as you are speculating that the price of the financial product will either go up or down. The spread betting broker will give a buy and a sell price, which is derived from the price of the underlying market that you intend to trade (example a stock index, commodity or share). If you think the financial product will go up in price, you buy or go long and if you think it will go down, you sell or go short.
There are a few key advantages to this inviting option:
- Flexibility: You can trade on the movement of over 12,000 markets including currencies, commodities, indices, sectors and individual equities.
- Make money in any market: Since you can trade on whether a financial product goes up or down you can profit even with falling prices. All you need to do is anticipate the future direction in which a particular market (example the FTSE 100) will move (ie whether prices will rise or fall) in the coming days.
- Tax advantages: In the UK spread betting is exempt from UK stamp duty and Capital Gains Tax. However, tax laws are subject to change and depend on individual circumstances. Please seek independent advice if necessary.
While these advantages make spread betting sound like the perfect way to invest, it isn’t without disadvantages, including:
- Margin risks: With spread betting, you trade on margin. Often those margins require only 1%-10% collateral. That makes losing all of your initial investment possible and also, more importantly, allows you to lose more money than you originally put into your account. Of course, you can reduce that risk by always placing a limit order to cap your losses on a given trade.
- Bid offer spreads: Commissions aren’t listed on spread bets because they’re built into the bid offer spreads. Don’t forget to consider those spreads when you are investing. They can add up and push up the cost of your investment.
If you have decided to try spread betting, I’m sure you’ll be diligent in your efforts to find a great spread betting company out there. Make sure that they’re reputable and that they offer the narrowest spreads possible. Spread betting can be a good investing tool if you use it carefully.
This post was provided by City Index.