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Financial Spread Betting: a beginner's guide

Financial spread betting - a beginners guide

Financial spread betting is a tax-free way to trade a wide range of financial markets. It is available to traders 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.

In our financial spread betting guide, we’ll help you to understand:

  1. how financial spread betting works
  2. what markets you can trade
  3. how your profits, or losses, are magnified
  4. the ways you can control your levels of risk
  5. how you can make an informed choice about which broker to trade with
  6. how to make best use of demo accounts
  7. why starting off with an account designed for beginners is a good idea

So, how does spread betting work?

When making a spread bet, you are not buying a physical asset, like a share or a barrel of oil, but 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.

What markets can you trade?

Financial spread betting comes with many advantages over trading physical markets, as it offers traders access to a wide range of markets.

Many traders start with stock market indices. These indices are measures that represent the performance of a specific group of stocks or the overall stock market in a particular region or sector. Popular stock market indices include the FTSE 100, Dow Jones, S&P 500, Nasdaq 100 and Nikkei 225.

Another group of markets that are popular with spread betting traders are commodities. These commodities are the raw materials from which products are made.

Examples of popular commodities include precious and industrial metals such as gold and copper, agricultural products such as wheat, fuel products such as crude oil and soft commodities like coffee and cocoa

Currencies are popular markets for spread bettors. Traders will trade a pair of currencies, betting on to strengthen or weaken against the other. The US Dollar is the most traded currency with the British Pound, Euro and Japanese Yen also widely traded.

Government debt, or Bonds, are widely traded on spread betting platforms too. These are IOUs from the government to the market whereby the government promises to pay those investing in bonds their full principal, in addition to a rate of interest on the bond that is determined when it is auctioned.

Popular Bonds include the UK 10 Year Gilt, US 10 Year Treasury Note, EuroBobl and Japanese Government Bonds.

Many of these markets can otherwise only be traded by buying futures and options on derivatives exchanges, which is generally considered a more expensive process.

How are Spread Betting profits or losses magnified?

Spread betting companies 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 benefit is that you get to keep the full value of any profits, but you do have to accept the full value of any losses too.

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. It would also be tax free; this could be a profit or a loss, depending on whether you were right or wrong.

How can I control risk?

One of the best ways to manage your risk when using a Spread Betting account is via a stop loss. A stop loss is an automatic instruction to close your trade at the price you specify.

It means you can limit your total loss on that trade at the point where you make it, making a valuable tool within your trading strategy.

While your online broker may not close the trade at exactly the right price, it will aim to close it as soon as it can thereafter. Stop losses are generally free to use with a financial spread betting account.

You can find out more about the different types of stop loss tools that are available here. If you want to find out more about trading, make sure you read our trading for beginners guide.

What are the benefits of starting with a Spread Betting demo account?

The majority of spread betting brokers offer demo accounts. They provide traders with the chance to test out a platform before they commit real money.

It is relatively easy to get started with a spread betting demo account too. Most Brokers are not required to perform the number of checks and collect as much personal information for a demo account as they do for a live account. Setting up a demo account is generally a speedy process.

opening up a spread betting demo account will let you practice trading with paper money – which means your profits and losses will not be real. It will also give you a feel for the platform you  have chosen before you 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 to avoid many of the common mistakes novice traders make.

How do I find the right Spread Betting account

You’ll find that some brokers offer services that are specifically designed with a novice in mind. These brokers provide spread betting accounts designed for beginners to help reduce some of the risks that you’ll be exposed to with a full spread betting account.

For the more experienced trader, we also have a more detailed list of spread betting brokers featuring our impartial view on their services. You can be assured that we will only include spread betting brokers that are authorised and regulated by the Financial Conduct Authority.

Before you open a spread betting account, we urge you to check the FCA’s Financial Services Register to ensure that your chosen broker is listed.

Islamic accounts

Financial spread betting is generally considered to be Haram for Muslims. However, many spread betting brokers now offer Islamic accounts that practice Shariah principles.

These Islamic spread betting accounts, also known as swap-free accounts, are halal trading accounts in which interest is not accumulated, collected or paid. These accounts do not make use of futures and forward contracts and all transactions (including the transaction cost) take place without any delay.

This is a subject for debate and you can read our thoughts on whether trading is Halal or Haram which explores the topic in more detail and provides a small selection of regulated brokers offering permissable accounts.

What next?

Here’s a selection of low stake spread betting accounts for you to take a look at. The spread betting brokers we feature on The Armchair Trader are all regulated by the FCA and will be a good benchmark as you research your options.

BrokerMinimum DepositMarketsProducts
Pepperstone
Pepperstone
£0Bonds
Commodities
Currencies
Indices
Stocks & Shares
CFDs
FX
Spread Betting

With a strong focus on the trading experience, industry leading technology, low costs and award-winning client support, we feel that Pepperstone is a good option for the more established high volume day trader.

 
Spreadex
Spreadex
£0Bonds
Commodities
Currencies
Indices
Stocks & Shares
CFDs
FX
Spread Betting

Spreadex offer a pretty unique proposition for UK and Ireland residents, combining sports betting and financial betting on one trading platform. Their range of markets includes equities, or stocks, and is broad enough to offer a choice of Small Caps with a market capitalisation of £1million and above. The only beef we have is the absence of a free platform demo. However, opening an account requires no initial deposit so new clients can familiarise themselves with the platform before committing funds

 
Trade Nation
Trade Nation
£0Bonds
Commodities
Currencies
Indices
Stocks & Shares
CFDs
FX
Spread Betting

Trade Nation offer something a little different for traders. You won't find research or educational tools - the emphasis is on trading, so pricing and fees can be kept low.

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