Financial spread betting is a tax-free way to trade a wide range of financial markets. It is available in the UK and Ireland only. To be able to open a spread betting account, you will need to be a resident of either country.
Financial spread betting brings with it many advantages over trading physical markets. It offers traders access to a wide range of markets, including stock market indexes, shares, commodities, government bonds, and currencies. Many of these markets can otherwise only be traded by buying futures and options on derivatives exchanges, a very expensive process.
When making a spread bet, you are not buying a physical asset, like a share or a barrel of oil. You are trying to make a profit from the change in the price of that asset or market. The great thing about spread betting is that it lets you take a long position – betting the price will go up, or a short position – betting the price will go down. This means you can potentially make money even when markets are falling.
Spread betting companies also lend you money with which to trade. This is called ‘leverage’, and all spread bets come with a certain level of leverage built into them. Spread betting companies will quote you a ‘margin’ level for each market, for example 5% or 10%. This is the amount of the total trade you need to deposit to open the trade. The rest of the value of the trade – the leverage – is lent to you by the spread betting company. The great thing is, you get to keep the full value of any profits, but you have to accept the full value of any losses too.
Controlling your risk with spread betting
When learning how to spread bet, you decide how much you want to risk by staking an amount of money against each ‘point’ the price changes on your chosen market. How many points the price might move in an average trading day will depend on the financial market you are trading. A share price might only move a few points in an average trading day, or it might move over a hundred. It is usually enough to focus on the last couple of digits in the price, but be aware that prices in financial markets can change suddenly. The amount you stake per point will determine your initial deposit and overall how much money you are risking in that trade.
For example, if a company’s share price has a 5% margin, and you deposit £100, while you would initially be risking only £100, the total value of your trade would be £2000. A 2% change in the share price would be a £2 change if you were holding £100 of shares in the stock market, but with this particular example of a spread bet, that 2% change would translate into 2% of £2000, namely £40. And it would be tax free. This could be a profit or a loss, depending on whether you were right or wrong.
One of the best ways to manage your risk when using an online financial trading account is via a stop loss: this is an automatic instruction to close your trade at the price you specify. It means you can limit the amount you lose in advance. You can read up on the different types of stop loss that are available to you here.
Opening a Spread Betting Account
The majority of spread betting brokers offer demo accounts, providing traders with the chance to test out their platform before they commit real money. We strongly suggest that you give your chosen platform a test drive before you begin trading for real. Read our short guide to spread betting demo accounts before you start – and we’ll help you avoid many of the common mistakes novice traders make.
You’ll find that some brokers offer services that are specifically designed with a novice in mind. These brokers provide spread betting accounts that help to mitigate some of the risk that you’ll be exposed to with a full spread betting account.Advertisement