A good understanding of the market or product is required when investing in anything to be successful and make a profit. Rarely is this more important than when spread betting, as there are various factors to consider that can affect this speculative financial activity.
Spread betting can be done across thousands of markets to earn (or in the worst cases lose) little and large amounts of money. In the same way that you are more likely to lose when betting on horse racing or other sports events, if you have no knowledge of the circumstances or teams involved, going in blind will lead to losing more when spread betting than making profits. Therefore understanding the markets is essential.
What is Spread Betting?
Unlike investing in stocks, shares or currency and backing it to increase in value, spread betting is an actual form of betting. It is a speculative activity whereby people trade on the price movements of any of the thousands of markets available, whether the markets are rising or falling. The bet can be closed at any time to either take a profit or prevent large losses.
When spread betting on company shares the trader usually bets on the change in share price, with the market movement measured in points. One point usually equates to one penny or cent. In other markets it could be one point change in the index level, either up or down. Essentially you are betting on the market increasing or decreasing in value, so can make a profit even if the markets fall.
Benefits and Risks
Spread betting offers many benefits as opposed to investing in shares through the traditional route. You do not have to pay capital gains tax on any profits from spread betting and it is free from Stamp Duty as well, which lowers the costs involved. Depending on the type of platform used for spread betting, commission may be charged but is often not, further reducing trading costs.
Leveraged trading is also available through spread betting so you can deposit a small percentage of the full value of your position on such speculative bets to make larger gains. This does present a lot of risk if the markets don’t move in the way you expected so it is important to set stop losses to control this.
Spread Betting Across Different Markets
Spread betting can be used on UK, EU, US, Asian and many other markets across the world in largely the same way, as you speculate whether the market value will rise or fall. However, you must be very familiar with the exact market to make informed decisions that will prove profitable in the long run.
Currency
The currency or forex market is the largest and most liquid in the world. Over $5 trillion are traded across it every day, offering up many opportunities to make a profit from spread betting as each currency will rise or fall in value every day due to a range of circumstances. When deciding to spread bet on this it is key to know the factors that affect currency value such as:
- Political Situations
- Interest Rates
- War
- Inflation
It is vital to stay up to date with the news regarding a country’s economic and political situation when preparing to make spread bets. Look out for elections, as currency value usually dips when these are coming up and offer a good chance to bet on that nation’s currency value falling, for example.
Indices
One of the most popular markets for new traders, stock indices can provide some of the tightest spreads around with bets of just one point possible to make. Traders can choose from the UK 100, Wall Street, France 40 and many other markets to trade on.
There are a range of factors that affect the stock or indices market which you should be aware of when spread betting. Internal developments for companies listed can see them increase or decrease in value so it is important to keep up with industry news, while inflation, interest and exchange rates can all play their part in ensuring you make a profit or loss spread betting.
Interest Rates
You can place spread bets on the position of a number of interest rates if you believe they will increase or decrease in the near or far future. The UK short sterling market and overseas ones such as the Eurodolllar and Euribor are some of the most popular interest rates to place spread bets upon.
Two main reasons interest rates change is when the central bank of a nation increases them due to various reasons and when inflation is happening. Higher inflation will result in increased interest rates and vice versa. Therefore it is useful that you pay attention to economic news and look at trends to make accurate predictions about their futures.
Precious Metals and Commodities
Everything from everyday commodities such as coffee and sugar to crude oil and precious metals including gold, silver and platinum can be subject to spread betting. Supply and demand are the major reasons for the value of commodities changing, when one outweighs the other it will increase or decrease in value.
The price of precious metals works in a similar way. As gold is used for manufacturing and jewellery purposes as well as investment the demand can become higher at certain times. On the whole the price of gold rarely drops too much so it is usually best to place a spread bet predicting an increase in value.
Important Considerations When Spread Betting
Whichever market you decide to begin spread betting on there are a few other things to take into account. Patience is required when you first begin, as nobody becomes rich overnight and it may take a bit of trial and error before you learn the best ways to speculate. Spend a lot of time reading up and practising before making spread bets for real.
Stop losses are your friend so use them whenever possible. They will prevent you losing too much money on just one or two trades, especially when leverage is involved. Be sure to research the markets and get a good understanding before you start spread betting to become as successful as possible.
