Ever wanted to delve deeper into the price movements of the financial markets and take advantage of them to reach your own financial goals? Then avail yourself of our helpful guide on everything a beginner should know about spreads and spread betting!
Spread betting in a nutshell
If you are looking to get your feet wet with spread betting, you first have to know what you’re getting into. So what is spread betting? In essence, this is a form of market speculation in which you try to predict whether the market you’re betting on will go either up or down. The beauty of it is that it takes little capital to get started and there’s no need to own the assets in question.
To get started (provided you have enough funds in your trading account), you only need to pick your position and decide on whether you believe the market is going to go up or down. Through spread betting, it’s possible to either win or lose money very quickly – the reason being is that the outcome of your bet is determined and multiplied not only by what direction the market trends shift to, but by how much (the spread is the difference between the entry and exit point of the trade).
The risks of spread betting
As is the case with other forms of trading, spread betting also comes with its fair share of risks. First of all, keep in mind this is a leveraged product. In other words, it can lose your money just as quickly as it can grow your bankroll.
Then, there’s the risk of account close-out if you decide to trade outside of usual business hours. By doing so, you run the risk of having your positions closed automatically by the platform. Don’t forget that markets can get volatile and not even the most experienced traders can get things right all the time.
Opening an account
Opening an account for spread bets and CFDs won’t take you longer than a minute, and it can be done from the comfort of your home. But before you do, it’s important to shop around for a little bit and find the kind of online trading platform that best fits your needs.
Some will have lower fees than others, but you shouldn’t base your decision solely on that factor. Certain traders, for example, place a high degree of emphasis on convenience, so they’ll be inclined to look for extra features such as integrated charts, news feeds, and extra educational materials. So make sure to read the online reviews to see what other users are saying about the platform you’re interested in.
After you’ve opened up your online trading account, you should be looking for ways to fund it. If you’re not comfortable giving out your credit card number over cyber security concerns, see if the platform supports other payment methods such as PayPal or direct deposit through a bank. When your finds arrive, you’ll be ready to start trading!
Getting ready to place your bet
To get comfortable with spread bets and CFDs, it’s a good idea to set up a demo account first to see how they work. This will be a valuable learning experience for you where you’ll be able to get some solid fundamentals on betting on financial markets without putting any of your capital at risk.
Once you’re ready to place your very first bet on spreads, the good news is that you won’t need to buy the entire underlying asset. You’ll only need to fund a small fraction of it and let leverage do the rest. Then, you’ll need to decide whether to go long or short with your bet, which is a fancy way of saying you believe the financial markets will go up (long) or down (short).
Spread betting examples
For example, let’s say you’ve chosen to bet on a stock movement and put in $5 when the value of the stock was at $70. You’ve decided to go long and things happen to work out your way so you exit when the stock is valued at $80. The amount you’ll earn is the difference between the entry and exit point, which in this case equals $10. Now, you only need to multiply this value by your initial investment (which in this case was $5) and the result is $50 – your total earnings (minus the broker fees).
Now let’s paint a losing scenario in which things go south. Once again, your bet amount is $5 and at the time of placing the bet the stock is valued at $70, just like before. This time, however, the stock keeps crashing so you decide to exit your position when the stock is valued at $60. 70 minus 60 once again equals 10, but this time around, it results in a net loss of $50 (your initial bet of $5 times 10, which is the difference between the entry and exit value of the stock).
The importance of monitoring your positions
Since financial markets are volatile by nature, it’s important to always keep an eye on your positions whether you’re doing CFD trading or spread betting. The good news is, most modern online trading platforms come equipped with stop loss functionality to prevent accumulating a substantial loss in case things don’t work out the way you’d intended.
To avoid a financial catastrophe, you can opt to attach stops and limits to your positions. This works two ways – you can either cut your losses or lock in any profits you’ve made after earning a particular amount (as to ensure the trend doesn’t reverse on you).
Stop loss functionality acts as a safety net to minimize the financial hit.
Even so, the importance of keeping an eye on price movements and monitoring your positions cannot be overemphasized. Most online trading platforms will make this easy for you, with some even offering the functionality of sending out automated alerts.
Closing the trade and withdrawing your earnings
When you believe it’s the right time to exit your position, find the button that says ‘close’ and press it (the name can be a bit deceiving, but that’s some of the trading terminology you’re going to have to learn). Another way to close the trade is to take the opposite position – this will automatically close it.
If your trade went successfully, congratulations! At this point, you can either leave the funds in your account or withdraw them. Do note that certain platforms impose a mandatory waiting period on money withdrawals and there will most likely be some minimum and maximum withdrawal limits.
By reaching the end of today’s post, you should now be equipped with the knowledge needed to try your hand at spread betting. Remember to always bet only what you can afford to lose and be mindful of the risks involved. Best of luck!
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.