Spread betting account: how it works?

Brokers are looking for new ways to attract people while taking advantage of new financial products that have hit the market in recent years. One option, called spread betting, is quite appealing for some traders to look for new potential ways to make a profit.

What do we call spread betting?

Spread betting is a type of derivative product that allows traders to use only a small deposit to open a position. This form of trading involves betting on the price direction of a financial instrument (up or down), rather than buying the asset, such as with traditional markets.

All assets are open to this form of trading, including:

• indices;
• currencies; (see the GBP-AUD derivative price chart)
• stocks;
• commodities
• bonds

This type of activity is available within over 10,000 markets.

Note that spread betting has both risks and rewards attached to it. Traders involved in this type of trade must weigh all sides before entering the market. Since you are only required to invest between 1 and 10 per cent of the value of your position, the potential gains but losses as well will be much higher than your initial capital cost.

The betting odds

Many stock players are attracted not by the expectation of a return on large investments or dividends, but by the desire to make money on changes in quotes in a short time. The very fact of buying papers for them, therefore, does not play a role; the important thing is that rates fluctuate.

Indeed, spread betting ranks alongside horse racing and sports sweepstakes. However, this activity is still more similar to stock trading than other types of betting, as it involves the use of market analysis.

The rate is made by assigning a certain amount for each point of increase or decrease in the rate of any financial instrument: from stocks to bonds, commodities, and currencies.

If at the end of the period the forecast was justified, the player receives a win, the value of which is proportional to the number of points by which the quote has changed, if not, they lose the proportional amount of money.

How it works

When deciding on a particular market, you are given both a buying and a selling price – this range is called the spread. If you believe the underlying market will rise, you bet on the bid price, but if you believe it will fall, you go with the asking price.

If the market swings in the direction of your forecast, you are in profit (the closer, the more profit). If it goes in the opposite direction, you lose (the bigger the difference, the bigger the loss).

Case from the wild

If you have reason to believe that the US 30 will rise, you log in to your spread betting platform and find out its quotes, which depend on the current market situation. If you place a spread bet on the rising trend, you will end up taking profit. If, contrarily, the index price trend goes the opposite way, you might lose a significant amount of money.

How to reduce risks

Risk management is at the core of any serious trader’s strategy:

1. You need to define your trading plan. This will help you make specific financial goals and determine your financial limits.
2. You must work hard to develop your skills. This is especially important if you are new to these products. Many brokers have developed features for new traders that allow you to count slowly at first. These include a two-week minimum trade size and a 6-week fee reduction.
3. You must gain a deep understanding of the markets you are betting on. Knowing what factors influence different markets will make you a better trader, as you will be able to focus on the most relevant information to make decisions.

Following these simple three conditions can help with risk management.

Set stop-loss orders

Use the broker tools at hand. Stop-loss orders are an efficient way to minimise the impact of a loss when the markets don’t go the way you predicted. If there is no stop loss, there is a chance that you will stop too late and not be able to recover your losses with subsequent actions.

Should I opt for this opportunity?

This occupation fits traders of all experience levels: from seasoned players to novice guys. The only factor that matters here is the way you learn the nuances of it.

Spread betting is for investors who are looking for additional opportunities to work with their capital, as well as for opportunists who would like to take advantage of market movements but is equally risky for all categories of traders.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.

The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.