An Introduction to Financial Spread Betting
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Introduction to Financial Spread Betting
In this introduction to financial spread betting we are going to look at it from a beginner’s perspective. If you are a little more advanced it might be helpful to go on to the next article but if you are a beginner this will serve as an excellent introduction.
So what exactly is spread betting? Put simply, it is a method of investing that involves betting on a stock’s movement. As with traditional share trading, the more the stocks share price moves in your favour, the more profit you can make. However, as with all trading there is risk involved and the more that prices move against you, the larger the losses can be. While commonly used in sports, the far more lucrative field is in classical financial markets such as stock indices. Financial spread trading is most popular in the UK.
Key Benefits and Risks
Financial betting is popular because of its low margins and high leverage (and tax benefits). Traders can go both short and long, thereby benefiting from a market that falls as well as one that is rising.
Trading on margin means that traders will typically deposit only a small percentage of the value they wish to trade which allows profits to quickly increase due to the additional leverage. It is worth noting however, that losses can exceed initial deposit should the market move against a position.
Easy Access to a Wide Range of Markets
When placing spreads, traders can speculate on the price movements of indices, shares, commodities, currencies and more. This is one of the main advantages of spread trading as it offers ordinary traders very easy access to a wide range of financial markets that may not be as readily available through other forms of trading. Many financial spread betting brokers offer round the clock trading with 24/7 access to your account online.
Tips for Managing Risk
It is highly recommended that new traders take precautions to manage their risk. The first step in this is to create goals that are realistic and not based on extreme speculation or the necessity of taking huge risks. By having a profit/loss strategy in place you help to avoid trading on impulse. These strategies are used by professional investors all the time to protect themselves from emotions and their own irrational exuberance.
The other critical thing every new trader needs to learn about is the market where they’ll be trading. If you struggle to understand what a price index is, and are lacking in awareness of what a p/e ratio is, then the first thing you’ll need to do is get studying up on your basic finance skills. Knowledge of the system is the single most important thing you can do to reduce the risks in your financial spread betting activities.
Another major tool for minimizing risk is the stop loss order. A stop loss order works as follows. If you make an investment of £1000, should the market position fall to a given point, say £1000 – £100 then your trades will automatically be closed. This prevents an investor from losing too much money as everything has a bottom point. Stop loss orders can also be used in spread betting for you to substantially lower your risk and protect your capital.
When just beginning, it is worth creating a small test account with which to trade. Some spread betting companies allow access to a virtual (that is, a not real) market through a demo account. A demo account mirrors a live trading account and it is a great way to get used to the system, any analysis software being utilized, and the trading process, without having to worry about whether or not you’ll actually be losing money.
This kind of virtual trading system is commonly used by investors for learning how to trade in traditional stock markets as it really goes a long way in helping beginners learn from their mistakes and understand how to trade successfully, without any risk.
24 Hour Trading Online
Finally, trading online can be a huge advantage. The days of having to place trades by calling a broker and getting them execute the deals are over. Online financial spread betting account providers such as Capital Spreads offer direct access to trade 24 hours a day at the click of a button. Not only are you able to place bets, you are also able to see up to date information and analyze graphical data when it is convenient to you.
The main advantage of this of course is for example, say the Dow Jones or Gold makes a big move overnight, with an online financial spread betting account you are in a prime position to take advantage of it and lock in those profits when they are available, rather than having to wait till your broker opens in the morning.