Understanding the Concept of Spread Betting: A Beginner’s Guide

Obtaining extra liquidity is a dream for some and a reality for others. If you have been hoping to enjoy life with a bit of extra cash in your pocket, there are a number of methods at your disposal. One common option is to become involved within the financial spread betting community. How do these positions function and what will you need to remember in order to experience success?

What is the Principle Behind Spreadbetting? 

Spread betting involves speculating upon the predicted price movements associated with a specific underlying asset. To put this another way, the trader will determine whether its value is likely to rise or fall within a given period of time. These actions are associated with a number of different markets such as currencies, stocks, commodities and index-based positions. The primary benefit of spread betting is that most positions are very flexible and quick turnaround times signify that you can realise short-term profits. The key is the possess the ability (and experience) to accurately predict the movements of these assets while minimising any losses that naturally occur from time to time.

What are the Main Pros and Cons? 

Many experts will note that the most interesting benefit of spread betting is that it is possible to speculate on the value of an asset even if it is decreasing. Unlike other financial specialists, investors can turn a profit in both rising (bullish) and falling (bearish) marketplaces. As a wide range of markets can be accessed, this method is also preferred by those who have been looking to diversify their portfolios. Other advantages include:

  • The possibility of trading on margin (investing only a fraction of the total value of the asset).
  • Most profits are not subject to any form of taxation.
  • Narrow spreads offer quick turnaround times.
  • Very few (if any) commissions and fees are added into the cost of the trade.

There are still a number of challenges to recognise from the very beginning. The first involves margin trades. Although profits may be substantial, losses can prove to be crippling. The prices of assets will change frequently and those who fail to keep up to date could likewise lose their initial capital outlay. Finally, some investment platforms offer better services than others. Those who are looking for a competitive edge are therefore encouraged to examine the tools and applications provided by CMC Markets.

Defining the Appropriate Spreadbetting Strategy 

Every trader will eventually discover how to leverage his or her own unique strategy. In regards to spread betting, there are a few hints to recognise. The first involves the size (width) of the spread. Wider spreads can be associated with higher profit margins, but they are also unpredictable at times. Narrower spreads have the ability to provide quicker returns and statistically, they are more likely to land “in the money”.

The other consideration when formulating a strategy should always involve personal finances. Those who are averse to risk should limit their exposure within a single trade (perhaps no more than five per cent of their total investment capital). Additionally, spreading your holdings throughout a number of different sectors will provide your portfolio with a greater degree of stability.

Choosing the Best Platform 

As mentioned earlier in this article, the type of spread betting platform will have a massive impact upon your success (or the lack thereof). Some of the factors to look for include:

  • Excellent levels of customer service.
  • Healthy margins.
  • A clear and concise commissions structure.
  • A wide range of underlying assets.
  • Access to mobile trading.

All of these traits will help novice traders “learn the ropes” without becoming exposed to undue levels of risk. Above all, we should remember that short-term positions are associated with occasional losses. It is important to accept such circumstances and to learn from them as opposed to allowing them to impact your overall sentiment. With prudence and experience, spread betting can provide you with an excellent source of income. Please feel free to refer back to this article for guidance in the future.