Spread betting not only provides investors with a more flexible way to enter the market than simply buying an asset and then holding it for future appreciation, but it also offers more benefits, including no taxes, no commissions, and a significantly lower capital outlay requirement, which makes it especially attractive.
But to benefit from this trading strategy, you must first understand what spread betting is and how does spread betting work.
What is Spread Betting?
When you place a spread bet, which can be on currency pairs, shares, commodities, and more, you are simply taking a stake whether you predict the price of the underlying financial asset will increase or decrease.
However, you do not actually take ownership of the underlying asset. Instead, you simply benefit from the price fluctuations when the market goes up or down; therefore, there are no taxes or commissions.
How Does Spread Betting Work?
According to Capital.com, “When making your bet, you open a position based on the assumption of the asset’s price future movement: whether it will rise or fall. You do not buy or sell the asset, like a commodity or a share, instead, you make a bet on how the market will move. When trading this way you buy or sell a specified amount per point of the asset’s movement – such as £10 per point. This is known as the stake.” Spread betting requires you to first know the value of a financial asset so that you can take a long or short position on the underlying market price.
Taking a long position means you are betting the market price will go up over a certain period of time. On the other hand, if you take a short position, it means you are betting that market prices will decline.
Your position’s gain or loss would then depend on how accurate your prediction was. For instance, if you bet that the market price of an underlying asset would go down, and it declined, then you would profit from your spread bet and vice versa.
Main Features of Spread Betting
The main features of spread betting include the bet size, spread, bet duration, and spread betting leverage.
When you place a spread bet, the amount of money you choose to put up per point of the underlying asset’s price movement is called the bet size.
Most markets have ask (Buy) prices and bid (Sell) prices in which you will buy slightly lower or higher than the middle price of the underlying market asset. The spread is the difference between the buy and sell prices and also the cost you pay for the position.
And the bet duration is simply the length of time your position will remain open before it ends.
Meanwhile, according to the experts at capital.com, “leverage is one of the main features that makes spread betting so popular among traders.”
This is because it provides traders the opportunity to open a more sizable trade with just a portion of the underlying asset’s price instead of having to pay the full cost of the investment upfront. Instead, the remainder of the cost of the investment is leveraged by your broker.
And it’s easy to get started with spread betting just by opening up a spread betting account, after which time you make an initial deposit for access to over 2,500 popular markets to begin trading. However, it is suggested you first know your risk tolerance and develop a spread trading strategy based on that to avoid major losses.