Spread Betting is a derivative-based financial trading product that that enables investors to speculate on the potential price movements of a wide variety of asset classes. These assets include commonly traded markets like forex (the currencies market), stock shares, stock indices and commodities, amongst others, and these markets can be used in both uptrending and downtrending environments to make gains on forecasted price activity.
Long vs Short Positions
One of the aspects of Spread Betting that many new traders do not yet understand is that gains can actually be realized during any market condition. Of course, when traders decide to go “long” in a given asset, gains will be achieved when the price of that asset increases. In these instances, however, if prices fall after long positions are opened losses will begin to accumulate. But it is important to remember that this is not always the case, as traders can also make profits during falling markets. By initiating in “short selling” positions when the forecasted price activity of an asset is negative, gains can actually be realized by first selling an asset and then buying it back at a later date (and, hopefully, for a cheaper price). When these “short selling” positions are opened, traders will actually need to be cautious of price increases in the asset, as this is what will ultimately generate losses.
Margin and Leverage
One characteristic that separates Spread Betting from other, more traditional types of investments is the fact that the assets traded are margined products. Essentially, what this means is that traders are required to deposit only a small portion of your total position size and then your broker will lend you the rest on a credit basis. The total gains (and losses) that are achieved by the position, though, are yours to keep and will be credited directly to your account balance. Margined trades enable traders to command positions that can create much larger gains, and this is one of the primary benefits of spread betting trades.
Spread betting brokers will generally require you to deposit anywhere from 1% to 10% of your total position size but this will vary and depend on which asset market is being traded. Currently, spread betting brokers are in the position to offer a huge variety of asset types, and this will cater to investors of many different trading styles.
Similar to other investment types, Spread Betting trades are quoted using a buy price (which is the price that will be given for long positions) and a sell (which is the price that will be given for short positions). The difference between these two prices is the “spread price” and this is essentially the charge that is given buy your broker in exchange for providing the trader access to a given market. This charge is typically referred to simply as the “spread” and this is where the term “spread betting” comes from.
For the most part, experienced traders look to keep these spread charges to a minimum, as these charges can build up over time and start to subtract from your overall profit and loss statistics. There are some additional factors to consider, however, as there will be some cases where a company seen offering a lower spread will be deficient in other ways.
For example, this broker might lack efficient trade execution or offer insufficient educational or charting tools. Traders also need to make sure that low spreads are offered for their preferred market of choice. In total, lower spreads, will enable traders to capture more of their gains and allow you to enter the market at a more preferable price. Whether you are trading the forex markets, individual shares, indices or commodities, spread costs will be one of the central factors to consider when you are choosing your broker.