Spread betting allows you to make money irrespective of whether markets are falling or rising. However, the leveraging integral in spread betting that can heighten your gains can impact your losses the same way. Therefore, spread bet is not a good investment strategy for the timid.
Spread betting allows you to bet on the movement of an asset price rather than buying the commodity. “When you bet for £1 you are exposed to 100 shares,” CMC Markets indicates, “and you make £1, if the share prices move by 1 cent or 1p.”
To help you cover the losses whenever the market moves against you, you will have to indicate a margin. This covers the percentage of your exposure and is known as the deposit factor or the notional trading requirement.
The amount you need to put down varies according to the liquidity and volatility of the asset in question.
If you resolve to hold a bet past its expiry date, then you can roll it over, but some additional costs will be factored into the spread.
Managing the Risk
In an attempt to manage the risk, you are allowed to place orders on your spread bet. For instance, stop-loss closes your position once the price falls past a certain level.
You can also pick up certain orders that allow you to take profit when a higher price is reached or buy at a set price.
Spread betting can be deployed in various ways.
- Short-term Speculation
Short-term speculation is the most common where traders go to the market and make money depending on price movements. This can be carried out for a matter of seconds.
Spread betting offers an appealing leverage, as you only require gathering a small amount of money to get gains similar to a share deal that could earn you a lot of money.
Hedging is also a common strategy for spread betting. This strategy works in that, you may have a large number of shares, but they have increased in value, but you think they are going to fall again.
However, if you sell these shares, you are going to trigger a tax liability (capital gains). The best move to take will be to take up a spread bet that matches your exposure; in this case, if the value falls, then you will not lose out.
Spread betting can also be used to hedge against other assets. For instance, if you would need a large sum of foreign currency in the future but you are wondering whether the exchange rate will be in your favour, then you could take out a spread bet that goes short on the currency you want to buy so that you do not lose money.
The influence of spread betting on its benefit serves as its key benefit. With spread betting, you have geared exposure; therefore, you will require less money than if you had the asset. For example, taking out a margin of £100 can mean a £1,000 of exposure.
UK residents can enjoy a no capital gains or income tax, or a no stamp duty on purchases they make. Therefore, you need not to include profits on your tax returns, but you will be unable to offset the losses against the gains.
With spread betting, you do not have to have to incur commission.
Be Prepared for Possible Losses
Despite the numerous benefits associated with spread betting, it also hosts a significant amount of risk. The potential to lose money is paramount in spread betting. Because spread betting embraces leveraging, the losses can be magnified.
Many people would go for spread betting due to the large gains that do not attract taxes. However, you should keep in mind that you can bet on margins; something that can make you lose money you do not have.
Spread bet companies are on the look out to ensure they minimise this and will issue margin calls whenever your losses are close to exceeding the margin you had set, and others resolve to close positions if you slip to the red. You are also in a position to put stop-losses to prevent the losses from becoming too large.