What is Spread Betting and How Does It Work?

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Have you ever heard of the term “spread betting“? If I had to venture a guess, I would say that most of the general public has never heard this term before. It’s just not something that most of us are involved in.

In its most basic form, spread betting is a margined product that allows you to deposit a small percentage of the value of your position. Also, you profit on both the rise or the fall of a particular market. You just have to make the right prediction.

How to Spread Bet

If you believe that a market will rise, you buy (go long) and your profits will go up in accordance with the rise in the price. If you think a market will fall, you can sell (go short) and your profits will rise as the market falls. If the markets rise or fall against your prediction, then you will lose in the same accord.

Select a Market

This is the first step in the spread bet. Since there are over 15,000 markets to choose from, it should be too difficult to find one that suits your liking.

Buy or Sell

Once you select your market, you’ll have to choose to either buy (go long) or sell (go short). Once again, if you think that your market will go up, then you’ll want to buy it. If you think it will fall, then you’ll choose to sell it. Your profits or losses will occur based on the movement of the market.

The Spread

This is merely the difference between the buy and the sell value, and ultimately, it’s the amount that you’ll have to pay to make the spread bet.

The Margin

This is the amount of money that you must have in your account before you place your spread bet, which is the small percentage between the trade value. Personally though, I would suggest that you have much more in your account than the margin – just in case you were to lose on your spread bet.

Stop Loss and Limit Orders

To protect yourself against a large loss, you’ll most likely want to buy a stop loss. This is a safety net for you in the event that the stock has moved in a direction that’s opposite what you expected. Once it reaches a certain value, your share in the market will automatically be sold, thereby limiting your losses.

In the same way, you could set up a limit order so that your shares are sold at a market value that gives you a great profit. This will guarantee your earnings at that high value, even if it’s only a spike in the market.

Monitor Your Trade 

Since markets rise and fall quickly, you’ll want to monitor your spread bet. There are great tools online as well as Apps that can help you with your tracking.

Close Your Trade

With Spread Betting, trades can easily be closed at an instant. This can be done either to cut your losses, or to cash in on your gain for the day.

Risks of Spread Betting

While spread betting can provide excellent gains, it can also come with large losses. Let’s say that you buy 100 shares that are worth $50 a piece, since you expect the value to rise. With the spread bet, you only have to cover 5% within your account (this percent may differ and is used only as an example), which means that you only need to have $250 in your account when you make the initial purchase.

If the stock increases, you’ll receive a tidy sum compared to your initial investment. However, if the stock goes down – let’s say, to $30, you’ll owe $2,000, plus the cost of the spread! That $250 suddenly didn’t come close to covering your trade!

This is the risk of spread betting, and it can actually happen, so please make your trades with caution.

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Money

Derek

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

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