Having multiple streams of income is the dream for a lot of people. There are many ways to do this, but one of the most common and effective ways is to get your hands dirty in spread betting. If you are very good at recognizing price moves or you have a knack for profiting from speculation, spread betting is perfect for you. Here is spread betting explained.
Spread betting refers to speculation on the direction of a financial market without owning the underlying security. You place a bet on the price movement of a security, then a spread betting company quotes the bid and asking price. Investors then bet on the price, either betting it will be lower than the bid or higher than the ask. All it takes is speculation to successfully spread betting. It is a very risky endeavor, but you have a lot of opportunities to make a high profit with zero taxes, high leverage and wide-ranging bid-ask spreads.
To make a long story short, it is a tax-free way for UK and Ireland citizens to speculate on rising and falling financial markets, with the ability to spread those bets without having to own those assets in the underlying market.
If you are an investor, you do not own the underlying security in the spread. All you are doing is speculating on the price movement. One important thing to note about spread betting is illegal in the United States, but you can legally practice it in some European countries especially in the United Kingdom.
The origin of spread betting is credited to Chicago mathematics teacher Charles K. McNeil in the 1940s. Three decades later it became a professional financial industry. There are many benefits to spread betting, from no commissions to tax benefits.
Things To Consider
Long Sell Or Short Sell
Short selling is just as easy as buying a short sell stock. As an investor in spread betting, you have the option to bet on both rising and falling prices. Spread betting allows you to easily short sell as opposed to trading physical shares and borrowing the stock. When you do this it may be too time-consuming, but with spread betting, you are able to streamline this process.
You will never have to worry about commission charges since spread betting companies make their money through the spread they provide. Since there are not any commission charges, it is much easier for you to keep a watchful eye on your trading costs and work out your position size.
It is commonly understood that spread betting is synonymous with gambling in some jurisdictions. For this reason, whatever you gain from spread betting may not be taxable so it is recommended that you keep good records and enlist the help of a great accountant when you are filing your taxes.
Spread betting is not foolproof. There are some drawbacks and limitations. You need to have a full grasp on understanding leverage. If you do not understand leverage, you can unknowingly take accounts that are too big resulting in margin calls. To avoid this you should not risk any more than two percent of your investment capital on a trade. You should be cognizant of the position value of the bet that is intended to open.
Be mindful of wide spreading that firms have a tendency of doing. Placing your spread orders right before company earnings announcements and economic reports, think twice. Spread betting firms widen their spreads as a direct result of economic volatility, which causes stop loss orders and increases trading costs.
Stop-loss orders decrease your risks by involuntarily closing out a losing trade as soon as a market passes a set price level. When you have a standard stop-loss order, your order will close out your trade at the best price at the time once the set stop value has been fulfilled. Keep in mind that your trade can be closed out at a more unfortunate level that the stop trigger.
Guaranteed stop-loss orders are a little different. This form of stop-loss order makes sure they only close your trade at the exact value you set. It does not take into account the underlying market conditions. Either way, it will close your trade at whatever value you put. Keep in mind that when you are dealing with guaranteed stop-loss orders, you will typically incur an extra charge from your broker.
Spread Betting Arbitrage
These opportunities occur when the prices of identical financial instruments switch up in different markets or companies. In turn, the financial instrument can be purchased low and sold high at the same time. If you use an arbitrage transaction, you will be able to use the inefficiencies of the market to gain a risk-free return.
When two companies take separate stances on the market while simultaneously setting their own spreads, this also creates an arbitrage opportunity. If you fall into this category, you can buy low from one company and sell high in another. The best part about this is that it does not matter if the market increases or decreases as it does not determine the amount of your return.
Now that you are more familiar with the origin of spread betting, what it is and how to do it, we can dive more into the best strategies. Below are some of the strategies you can use to be.
Spread Betting Around Corporate Actions
There are a few strategies that can help you get the hang of spread betting. Keeping a lookout on certain companies’ yearly general meetings can benefit you in the long run. The reason being is that you can get a head start on any potential dividend announcements as well as other company news that has an effect on stocks. You should take advantage of corporate actions as a way to trigger a round of spread betting.
Technical Analysis Strategies
You can spread bet well over 12,000 global markets across different assets like stocks, indices, forex, commodities, metals, bonds, options, interest rates and market sectors. To be successful in this strategy takes a lot of observation. You would have to apply trend following, trend reversal, breakout trading and momentum trading strategies. For this strategy, it is best to enlist a betting firm.
Structuring Entry And Exit
Structuring your trades as a way to balance profit-and-loss is a great strategy. When you structure your trades, even if you lose the bet you may not necessarily lose the trade. You will be able to structure your bets with favorable profit levels despite the odds not being in your favor.
News traders, also known as active spread bettors, typically pick assets that are highly influenced by news items. These news traders place their bets according to a structured trading plan. To paint the picture plainly, if you hear something about a company like a bank making an interest-rate change in the news, you can expect to see its effects through their bonds and stock indices.
Another great example of this for displaying news traders is when a company is waiting for the results of a major project bidding. This is a great option because no matter what happens, whether the stock price swing in either direction, you can be sure to find active spread bettors taking positions on both outcomes.
As you can see, spread betting is a great way to come up and earn extra money. It poses tax advantages as profits are tax-free for residents of the UK and Ireland. You also do not have to pay stamp duty either since you are not the owner of the underlying asset. You are able to trade both rising and falling markets, so you never have to worry about the prices. Be sure that you are going the distance in markets that are going up and cut back if you believe the stock prices are going to fall. There is not a huge investment risk because you can use a small deposit in order to control a bigger value trade. There are no separate commission charges and you can limit your currency risk exposure by betting in GBP on all markets.
Spread betting is a great way to make some extra cash, but it takes some learning and getting used to it. There are many different ways you can participate in this type of trading. You can trade across all different forms of trading avenues. One of the best things about spread betting is you are able to lower the barrier of entry. If you are wanting to get into the stocks business, start with spread betting to get your feet wet in the experience. Spread betting has also contributed to a diversified marketplace, which is great for investors.
No matter what you do, make sure that though you may be trading confidently, you need to understand all the risks. There is a way for you to make fast trades, you just may need some help along the way. All you need is the right trading firm to help guide you down the right path.