The Basics of Financial Spread Betting
Spread betting enables traders to speculate on financial markets and make a profit on prices that are rising or falling. Going long entails attempting to profit from rising prices, while going short means traders attempt to make a profit from falling prices.
A spread bet is a financial derivative and can be placed on a range of financial markets. As it is a derivative, traders do not own the underlying investments, but instead speculate on market movements. Some commonly speculated markets include equities, indices, currencies and commodities.
Using Leverage
Leverage, also known as gearing, allows a spread bet to potentially translate into a larger profit than would be attainable using the precise capital value of the speculative position. Opening a financial spread betting position can be done using an initial deposit, which can then command a much greater position in the market, through leverage.
Leverage is made possible because spread betting does not entail actual ownership of the underlying financial instruments in the market. The derivate position is leveraged, but it is important to understand, at the outset, that this can also ultimately result in magnified losses.
It is therefore advisable for speculators to only place spread bets with money that they can afford to lose.
Risk Management
Spread betting can result, through leverage, in potentially magnified losses. It is therefore essential that speculators are aware of this possibility and of ways in which to manage potentially risky developments.
A primary method of risk management entails understanding the financial market in which you are taking a speculative position.
Stock markets, for example, can be more or less volatile in times of political instability. You may find that share prices become more volatile than they otherwise might be.
Following the direction of a financial market can be aided by charts, which help visualise raw market figures. They are useful when checking the historical performance of a financial market, indicating its rising or falling nature, as well how stable prices are, over a period of time. Charts can help you see when markets are volatile.
Risk management can also entail monitoring your open positions. Financial markets can move suddenly and without warning, even in stable times, as they are impacted by news events or other external stimuli. Monitoring your open positions can be done through, for example, a trading platform such as a desktop application or an internet enabled trading program.
It’s not possible to check your position 24/7, therefore, spread betting firms like IG Index and Financial Spreads offer stop orders and limit orders. Stop and limit orders mean you can set a predefined level at which your positions are automatically closed. Whilst these orders help you with your risk management it is important to note that they are not guaranteed.
Financial spread betting is a geared investment product, it involves a high degree of risk to your funds and you can lose more than your investment. Ensure that spread betting fits your investment objectives as it may not be appropriate for all investors. Before trading, please ensure that you are fully aware of the risk involved. Seek independent financial advice where required.