- What are the secrets of spread betting?
There really aren’t any secrets. The key behind successful spread betting is all common sense. If you do your own research, understand the bet you're making and manage your risk, you may succeed. There are no guaranteed ways to win money from spread betting, but there are some guaranteed ways to lose it.
- I am a new to spread betting, what kind of bets should I make?
Spread betting offers several different, complex spreads. An experienced spread better may find it convenient and useful to use these different bets and orders, but usually a beginner should stick to the basics. As a rule when you are beginning to spread bet, make sure you bet small amounts, on something you know well (even sports) and use basic bets, such as a simple buy or sell. Once you have some experience in betting, the spreads will start to make more sense and you will begin to diversify your bets.
- What is the problem with betting large amounts as a beginner?
For spread betting beginners it is often shocking to realise how much money can be moved on a single bet. Considering that you are wagering a sum per point of change, you have to be very careful with how much you wager. If you make a £100 bet, and the stock moves 35 points, which is only £0.35, then you are all of a sudden £3,500 richer or poorer, depending on your bet. It is very important for traders to understand how quickly an asset’s value can change, before they begin to spend large sums of money.
- If I make a spread bet do I have to watch the market constantly to ensure that I close the bet at the right time?
Thanks to features such as automatic stop loss and limit orders that spread betting brokers offer, you really don’t have to watch your bets very much at all. As long as you know at what price you want to either close or open a trade, then the broker will do the rest for you, whenever that price appears.
- Why isn’t spread betting taxed, and will it be in the future?
As far as we can see, spread betting will never and should never be taxed. The FSA defines spread betting under the category of gambling because the odds are in favour of the brokerage company. Because it is gambling, whatever you win is technically a prize and not a capital gain. It is unlikely that the British government will ever classify spread betting in the same category as investing.
- Why do spreads sometimes widen or tighten?
The spreads that the spread betting companies quote are closely based on the actual spreads created by the market. The reason that they sometimes widen or tighten is all based on volatility. In a very volatile market, the price is much harder to predict and therefore the spreads will be much wider. But in a fairly stable market, the spreads will be set much tighter.
- How do spread betting companies make a profit?
Ideally for every person placing a buy bet with a spread betting company there is another person placing a sell bet. This means that one will win and one will lose, and the company will end up simply earning the spread. Sometimes there will be more people on the winning side and the company will make less money, sometimes there will be more on the losing side and the company will make more.
Here is an example:
One person buys the DJIA for £1 at 11,135 and the other one sells it for £1 at 11,100. The Dow closes at 11,200, so the person who bought it at 11,135 will earn £65 and the person who sold it will lose £100. Therefore the spread betting company will make a profit of £35, which is equal to the spread that was set at the beginning of the bet.
- Should I use an automatic stop loss or a guaranteed stop loss?
In spread betting, the choice between a stop loss and a guaranteed stop loss is often determined by the volatility of what you are betting on. The only risk in doing a simple stop loss is that the price could move too rapidly for the function to protect you. This however is highly unlikely and even if it does move past the stop loss setting, it should only result in a small additional loss, often not substantial enough to merit the costs of a guaranteed stop loss.
One decision that is very simple is whether any stop loss function should be used at all. It is essential to limit risk when spread betting and this is the best and cheapest way to do it.
- What is the difference between spread betting, and contracts for difference (CFDs)?
The major difference between spread betting and CFDs is their tax treatment. CFDs are subject to Capital Gains Tax and spread bets are not. This does not however mean that spread betting is necessarily better. If you lose a spread bet it is a complete loss, however if you have a loss on a CFD you can write that loss off against your capital gains for the year. There are several other differences such as how the commissions are laid out in each one. For further comparisons on the differences between CFDs and spread betting, see our Beginners Guide.
- What is the difference between a deposit account and a credit account?
These are both accounts at spread betting companies that allow traders to begin to bet on the company’s spreads. Deposit accounts usually require a minimum deposit of £50-£100. There are also minimum balance regulations which will only allow a bet to be made if there is sufficient capital in the account.
Credit accounts are sometimes available to traders, but require an extensive application process. Credit accounts simply allow the trader a predetermined amount, without having to deposit any cash in advance.
- I am new to spread betting and do not want to risk too much money, what is the minimum amount I can bet?
Most spread betting companies will allow you to bet as little as £0.50 per point. This is a very good way to begin spread betting and get experience before you risk too much money. Another option that is offered by many spread betting companies is to set up a demo account.This will allow you to practise trading with money that has no actual monetary value. It is also a good way to gain experience and to realise how much money can move, if too much is wagered.
- What is betting on margin?
Betting on margin is when you use some of the spread betting company’s money to place a bet. There will be a minimum margin requirement which forces the spread better to have a certain percentage, usually between 7%-10%, of their own capital tied up in the trade. Margin trading allows the trader more money than he actually has on hand, but it can be very dangerous because all losses must still be repaid.
- What is sport spread betting?
This is a type of spread betting that is related to sports and many arbitrary aspects of sports. In our Glossary you will find several examples of different sport spread bets.
- Can I make spread bets on things other than stocks and commodities?
Spread betting companies offer tens of thousands of spreads daily, on several different assets, and even derivatives. Here is a brief list of different spread bets available:
• Foreign exchange
• Interest rates
- What is the biggest risk involved in spread betting?
The largest risk in spread betting is inexperience and ignorance. Spread betting is a complex game and it involves large sums of money, if a trader fails to do his research beforehand it could be very expensive for him. The most important aspects to understand are the concepts of the bet per unit and the stop loss function. If a trader does not understand that whatever they wager is a ‘per unit of change’ contract, he will inevitably trade more than he had wished to and then be shocked when he loses it. It is also important to understand how the stop loss function can help to decrease risk.
- How can I find out more about spread betting?
To find out more about spread betting, please request a brochure via the Trading Centre’s Request a Brochure page.