Although, spread betting was invented in the 1970s, it wasn’t until the 1990s that it became a popular investment option among the general public.
This is because of the technological development that has taken place in the last two decades – which has allowed investors to have more access to it via spread betting platforms.
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Why Are People Turning to Spread Betting?
The most enticing thing about this form of investment is the potential for huge profits given the high leverage that a person can get. Also, spread betting is tax efficient.
For instance, in the UK, capital gains tax is applied to the profit you make above £10,600 in general for all investment vehicles. In the case of spread betting, no capital gains tax applies whatsoever.
Thus, investors who make more than the above-mentioned amount trading should seriously consider spread betting to take advantage of its tax saving feature.
What is Spread Betting?
Spread betting is a financial derivative and way of investing in which a person can trade a wide variety of assets in different markets.
The way it works is that an individual places a bet (either a long “buy” or short “sell”) position on an asset (stock, currency, commodity, etc.) depending on whether he thinks that particular asset will either rise or fall in the future.
For example, if Apple’s stock is trading at 89/90 (sell price/buy price) and you think the price will go up due to a tax reform (or any other news) which could benefit the company, you will go on a long (buy) position. Every position you have in spread betting should have a stake. A stake is basically the amount you will make per point that the stock moves from the initial buy price – which in this case is 90.
Let’s say you placed a £5 stake on a long position. In a favorable scenario, let’s say Apple’s stock increased its value and you decided to close your position when it reached 120. Thus, your profit will be £5*(120-90) = £150. In case Apple’s stock went down and you close your position at, let’s say 75, you would lose £5*(90-75) = £75.
Statistical data from spread betting establishments implies the success of the spread better is dependent upon a deep understanding of the markets. Because the subject can be so involved, 1 in 10 traders generate substantial profits from these ventures. This is most likely due to the high volatility in betting markets and a lack of understanding on the traders side.
Spread Betting Tips
In case you decide to start spread betting, here are a couple of tips that can help you improve your chances of winning:
Understand the Market
Assets that can be traded in spread betting are indexes, currencies, commodities, etc. That being said, you should know the assets themselves as well as the factors that can influence their price. It is important to be aware of the news that can have an impact on the asset in order to make the most appropriate decision. For instance, gold usually goes up in price when the economy isn’t doing well. Thus, any news that can affect the world economy is a good sign that you may probably profit from going long on gold.
Set stop losses
Managing your risk is very important in spread betting. Placing a stop loss will minimize your losses and will help you protect your capital. It is also recommendable to set guaranteed stop-loss orders to be safe in case there is a gap in the price movement of the asset you plan to place your bet in.
Diversify
Never put all of your funds in a single bet nor place bets on a single market. Instead, spread your bets across a variety of assets in different markets. It is important to do so in order to manage your risk.
CMC Markets is a leading company in the spread betting industry. If you want to start your spread betting career, you can download their demo platform which offers many advanced features such as pattern recognition, and price projection among others.