The phrase spread betting can be received negatively by many who come across it for the first time. People ask questions like 鈥淲hat does gambling have to do with investing?鈥� Spread betting is a simple concept where investors use historical data and maths to predict whether a given asset will rise or fall in price over a set period. Trading is never certain, and there is no such thing as an investment 100% guaranteed to convert, except if it is being unduly influenced.
Spread Betting 101
The act of speculating on the direction of a financial market without taking ownership of the asset in question is known as . This concept involves placing bets on a security鈥檚 price movement and often involves two quote prices from the spread betting provider. The ask price (the spread) and the bid price are always present in every spread betting transaction. As an investor, you鈥檒l be required to 鈥渂et鈥� whether the price of your chosen security will be higher than the ask or lower than the bid after a pre-agreed time.
Throughout this process, you never have to own the asset you鈥檙e trading. This reality is what makes the idea of spread betting attractive to many investors, especially those with limited financial capabilities. Many seasoned investors with the financial ability to make trades also favour this concept because they can do more without unnecessarily 鈥渢ying up鈥� their capital. The and reasonably easy to understand, but effectively executing spread bets for maximum profit is not always straightforward.
Spread Betting in Action
Here鈥檚 an example to better explain the idea and concepts behind spread betting:聽
Assuming you choose to invest in a fictional company called Orange, the stock is currently trading at 拢101.50. A spread betting company offers a fixed spread with a bid/ask at 拢101/拢103. You鈥檙e the investor in this example, and you鈥檙e currently bearish because you believe that Orange鈥檚 stock price will fall below 拢100, so you set a bid to sell at 拢100. You also bet 拢10 for every point this stock falls below the price of 拢100.聽
Let鈥檚 say that Orange鈥檚 stock price falls to a level where the bid/ask is 拢85/拢88, you can expect to exit your trade with a healthy profit of {(拢100 – 拢88 * 拢10 = 拢120)}. If your prediction is not correct and the stock price rises to 拢112/拢115, and you decide to exit your trade at that point, then your loss will be {(拢100 – 拢115) * 拢10 = -拢150}. Most spread betting companies offer margins to traders, and if you trade with a 10% margin, for example, the company will only require a 10% total deposit when the trade starts {(拢100 * 拢10) * 10% = 拢100}.
Things to Keep in Mind Before Spread Betting
Keep Track of your Margins
As comical as it might seem, many investors have mistakenly thought they get to keep more than they earned out of trades due to a poor understanding of margins and ratios. In the same vein, many investors have lost incredible sums (relative) because they failed to . One of the best things you can do as a spread betting professional in the UK is to better understand the concepts around margins before executing trades.
Tax Burden and Reliefs
If you begin trading securities without learning about your potential tax burden, you can lose even after winning on trades. Investors are subject to different tax rates, but your tax rate also depends on how much you have made during the year. Alternatively, you can be eligible for tax relief and reimbursements as a retail trader, but you鈥檒l never know unless you research or contact a tax professional. Imagine making good returns as a spread betting professional but missing out on more returns because you failed to learn about tax breaks you might be eligible for.
It鈥檚 not a Get-Rich-Quick Scheme
Some potential investors get poor information from swindlers and investment 鈥渋nfluencers鈥� on how easy it is to make money through spread betting, how this strategy has a close to 100% return rate, and how millionaires are being minted almost daily. Spread betting is a lot of things, but one thing it鈥檚 not is a 100% surefire way to make incredible returns. Try to sift through the noise, find people in the space you trust, join forums, educate yourself, and execute trades you can afford to cover if things go awry.
Time to Win
There鈥檚 no better time to be a new securities trader in the UK because of the sheer volume of materials to learn from and historical data to guide your trades. What are you waiting for? Open your first spread betting account today and help usher in a new reality in the UK trading ecosystem.