Many traders dive into spread betting without the requisite knowledge of it. As such, most of them experience challenges with the spread betting activities, which inconveniences their experience.
As a beginner, it is crucial to take your time and learn how spread betting works, what it takes to start spread betting, the risks associated with it, among others. That is what this our ultimate guide is all about.
The TradingGuide team is going to take you through all the details revolving around spread betting. Hopefully, at the end of this guide, you will know how to get you started with this trading activity.
What is Spread Betting?
Spread betting is a derivative form of trading that allows you to either go long or go short on the financial markets, including forex, shares, commodities, and more.
This means that, like CFD trading, spread betting involves speculating on the fluctuating prices of financial assets. However, what makes it different is that traders bet on whether an asset’s price will increase or decrease, whereas CFD involves exchanging the difference in prices from when the contract began to when it closed.
When you spread bet, you do not take ownership of the underlying asset, which gives you many options to increase your profit potential. It is an investment that carries risks, but if you apply the appropriate strategies, it could keep you smiling on your way to the bank.
One of the benefits of spread betting in the UK is that it is tax-free. This is because this financial derivative trading is classified as gambling, which in the UK is not seen as a business venture.
How Spread Betting Works
Let’s begin with an example. A company’s stocks is undervalued by the majority of traders. You have a different view of it from the results of your market analysis. So, what you do is that you are going to open a buy order position, hoping that the stocks’ prices will go up.
In case the prices work in your favour, you will earn points, which you will multiply with the amount you stake per point. This amount is now your profit. However, in case the prices reduce, you lose your investment funds.
It is crucial to note that spread betting comes in two different forms. You can either go long or go short. Going long means that you choose the “buy price,” which speculates if an asset’s price will increase.
On the other hand, going short is like the selling price. Here, you are to bet on an asset if you believe that its price will fall. You do not have to state the exact amount which the price will reach. Simply predict the direction in which it will follow.
Spread betting does not limit the amount you earn or stake. Depending on your budget, you can bet on various financial assets as you please. That is why choosing a broker that offers spread betting with fees within your budget is important.
Spread and Bet Sizes
Spread and bet sizes are key terms that are used in spread betting. We believe that it is essential that you understand them in detail before venturing into this derivative strategy.
There is usually no trading commission in spread betting. What you will incur is spread, which is the difference between the listed buying and selling price on the markets.
For example, when a stock’s buying price is £100, and the selling price is £102, the difference between these prices is the spread, and this is what you will pay the broker to open a position.
Bet size is the stake that you place on during spread betting. Note that in spread betting, there are usually points that you will earn when the price is rising or falling. That being said, bet size allows you to decide how much you will allocate to one point in a trade.
If the price moves in your favour, you will earn more points, hence increasing your profits. The total points you earn after a trade closes are what you will multiply by your stake amount to know your profit. If your speculation does not favour you, then you lose your stake amount.
Leverage and Margin
Spread betting with leverage is another way of increasing your profit potential. Spread betting with leverage means that you bet with funds borrowed from your broker.
Note that as much as this type of strategy can increase your chances of earning profits, it could also cause you a significant loss. That is why you need to be very keen while spread betting with leverage.
Since spread betting carries high risks of potential profits and losses, UK has strict regulations on leverage. The capped amount for leverage can go as high as 20:1 for currency pairs and 10:1 for stock trading. Make sure you understand the leverage available for any asset that you wish to spread bet on.
Note: Leverage in the UK has no negative balance protection. Therefore, while spread betting with leverage, remember that you do not have protection on losing more than what you can afford.
Spread Betting Risk Management
Spread betting is an easy form of trading to master, and beginners should not hesitate to try it. Many traders are succeeding with spread betting mainly because they remained consistent and patient.
Additionally, having a suitable broker will also help in your success. The broker should be regulated by tier-one regulatory bodies and offer what blends with your needs. This includes the platform, market assets, and commission/fees.
It’s a no-brainer that this derivative form of trading carries high potential, whether it’s for profits or loss. However, you need to know how to manage the risks involved for you to benefit from spread betting. The broker you are choosing should let you access the necessary trading tools to help in your strategy.
The tips that will help you to manage spread betting risks include:
- Stop-Loss Orders
Stop-loss orders prevent you from losing your money. With this strategy, you choose a price which the trade should close in case it does not favour you. Although you will not end up bagging a good profit, you are guaranteed your investment funds.
- Take-profit Orders
Installing take-profit orders also goes a long way in mitigating risks associated with spread betting. Here, you will set the level by which your position should close, regardless of whether the prices keep rising or falling.
For example, a company’s shares buying price is £100, and you decide to go long on it. If you implement take-profit order of, let’s say 10%, the position will automatically close when the price hits £110.
- Guaranteed Stop-loss Orders
Guarantees stop-loss orders assure you that your position will automatically close at a certain level even when market gapping occurs. Market gapping is usually the time when an asset’s price changes after the regular trading hours.
Since you cannot close your trades when market gapping occurs, a stop-loss order will not apply in this scenario. Note that you will pay a small fee for installing the guaranteed stop-loss order.
- Understand the Market Assets
Another way to limit spread betting risks is to trade on the market assets you are well-versed with. Whether it’s forex, stocks, or commodities, do not risk your money on assets that you have little knowledge about. It will only increase your loss potential.
- Prepare for Losses
If you believe that spread betting should always bring you profits, then you are wrong. Even the expert traders lose sometimes. Therefore, it will suit you to be emotionally ready for losses when you spread bet.
The reason why we advise you to prepare for losses is that some traders do not know how to manage themselves when they lose. In most scenarios, they find themselves betting on other assets recklessly, hoping to recover lost funds.
That being said, always take advantage of the above strategies and minimise the spread betting risks.
Factors to Consider Before Spread Betting
The first thing you need to do before venturing into spread betting is finding the best broker that meets your trading requirements. On this website, we also have reviewed the best spread betting apps in the UK, which you can go through and choose the right fit.
So, how do you know if a broker is best for your spread betting needs? What do you look for? Well, let’s take a look below.
You must have heard that a good broker must be regulated by the most stringent authorities globally. This is undoubtedly true. The reason why you should pick such brokers is that these authorities regulate them.
The authorities have set strict conditions that these brokers must adhere to or risk extreme penalties like having licenses revoked. Some of the rules these brokers should follow are to secure your trading funds and set for you a conducive environment for spread betting.
The Financial Conduct Authority (FCA) is the leading financial regulator in the UK. If you feel like a broker is going against trading rules, you can report them to the FCA. Also, you can check a broker’s credibility by visiting this authority’s websites.
Spread Betting Tools
Having the necessary tools provided to you by your broker is the best feeling during spread betting. Not only does it show that a broker cares, but it also eases the process of market analysis. These include charting tools, technical indicators, news feeds, and more.
As discussed above, the spread is the difference between the buying price and the selling price provided by a broker. Note that brokers’ spreads vary depending on the market offerings. Therefore, choose a broker with the spreads which you can afford.
There is also a broker’s fee that you need to be aware of, such as the minimum deposit, transaction costs, and inactivity fees. Knowing these fees helps in budgeting and figuring out if you intend to be a frequent trader or not.
Spread betting platform choice is very crucial for your activities. A broker’s platform should be easy to navigate and use. It should also offer educational materials for you, especially since you are a beginner.
Also, good brokers have demo accounts. Through such accounts, you will have a clear view of how the real one looks like. You will be able to test its performance, market accessibility, and more. It is a great tool to save you from choosing the wrong broker.
There is no way you can confirm if the broker is reliable other than from user reviews. These are honest comments on Google Play, the App Store, and Trustpilot, and they are some of the tools that help us in recommending the best spread betting brokers.
Although there are tons of reviews on these platforms, we do not go through all of them. We simply sample a few and recommend brokers based on those findings. Rest assured that our ratings on these brokers are not biased.
Spread Betting Strategies
Without a good spread betting strategy, your potential of making profits is limited. Spread betting is a risky form of trade because you do not own the underlying assets. You need to be very keen with your moves, especially when analysing the markets.
Spread betting strategy is a method that you will use to open a position and manage your activities before closing it. It pinpoints the entry and exits points for you, thereby helping you to manage your activities effectively.
We have studied plenty of spread betting strategies and have listed below some of the best to help you along the way.
Trend Market Strategy
This is the best strategy if you intend to hold a market position for a more extended period. With this strategy, you will need technical analysis and charts to identify how the market moves from the beginning to the end.
The best thing about trend market strategy is that you can take advantage of the volatility and open a position ahead of the markets. However, you need to be very careful with your strategy and be sure of the market expectation.
If you want a trading strategy that increases your chances of making profits and limits loss potential, then a breakout strategy is your best bet. This strategy is applicable mainly when a market is almost reaching its highest or lowest from the usual trending range.
With a breakout strategy, you will identify the level that you expect an asset’s price to break through (support and resistance levels). You will then decide whether to go long or go short on the price. It is one of the most straightforward spread betting strategies to master.
As the name says, a reversal strategy is about identifying the positions where trends are likely to change direction. You will either bet bullish or bearish, meaning that you will suggest whether the market will rise or fall.
Note that when using this strategy, you will either go long or short in the opposite direction of the current trend. This is so that you may benefit when the market reversal begins.
Traders need to be very careful with this strategy and conduct thorough research before using it. Take advantage of your broker’s charting package and ensure that the markets will not just be experiencing retracement, since this may affect your trade.
Reversal strategy is very profitable with good research. Therefore, we believe that it is worth applying during spread betting.
Consolidating Market (Range) Strategy
This strategy is range-bound, meaning that it ranges between the support and resistance levels. You will need to use indicators and identify the best entry and exit points within your trade markets.
Consolidating market strategy is also easy to understand and has proven helpful to many traders. Traders mainly apply it by waiting for the range to reach a breakthrough point before closing their positions and implementing a new strategy.
Pros and Cons of Spread Betting
- Spread betting in the UK is classed in the gambling category, and as such, any gains from this activity are tax-free. You do not have to add any spread betting information on your annual tax returns.
- With spread betting, you can apply high leverage, which increases your profit potential. Note that it carries high risks, but you will make good profits if you know when to use it.
- Spread betting allows you to trade even when market assets’ prices are falling. You will either go long or go short and still bag good profits.
- The entry-level of spread betting can go as low as £1 per point. This means that it is one of the trading activities with the cheapest entry levels in the industry.
- You will not incur spread betting commissions while dealing with any broker. The only charges to expect are spreads.
- You can spread bet on a wide range of financial assets using a single account. These market assets include forex, stocks, commodities, and more.
- Spread betting does not limit any trader. So, whether you are on a low budget or high, newbie or experienced, this activity is suitable for you.
- As much as high leverage can earn you good profits, it can also make you lose a lot of money. Remember, nowadays the UK spread betting regulations do not support negative balance protection. Therefore, leverage can make you lose more than you can afford.
- Spread betting is all about betting on fluctuating market assets’ prices. This means that you will never take ownership of the assets you trade.
- Spread betting can cause you unlimited losses if you do not apply the risk management tips like stop-loss orders and more.
- Brokers charges rollover fees on positions renewed beyond the expiry date.
Now that you know how spread betting works, there are vital things to note. You need to have a spread betting plan, including your goals, style to apply, and loss potential. You also need to identify the assets that you are going to bet on. It could be forex, stocks, and more. Just make sure you have the requisite knowledge about the asset to increase your profit potential.
Remember, spread betting has risk management tools, and we encourage you to take advantage of them. When you speculate on the assets’ prices, chances are the markets might go against you. Therefore, you can save yourself from losing money when you mitigate the risks, especially if you had applied leverage.
Ultimately, spread betting is a profitable investment. Therefore start by choosing the right spread betting broker that is regulated by the UK’s FCA. We have recommended the best here at TradingGuide.co.uk, so feel free to choose accordingly.