What is Spread Betting?
Spread betting is a kind of betting that allows you to take a position on whether you think a market will rise in value or fall, without actually buying the stock/underlying asset. It is completely different from trading stocks on the stock market. When trading stock, shares are bought in the hope they will rise in value so they can be sold on for a profit, and are sold on the fall, or expectation of a fall in value to minimise loss. Spread betting on the other hand allows you to bet on whether the value of a stock will fall as well as predicting it will rise.
Spread betting is leveraged. This means that you may only choose to deposit a small amount but it allows for a much greater market exposure. Betting using leverage comes with significant benefits and risks. The danger comes with the fact that it allows you to wager much more than the cash you pay up front, and it’s not always obvious how much money you could stand to lose. It allows you to win many times your initial stake, but also lose more than you initially deposit.
Assume that a spread betting company quotes a bid of £190 and an offer of £193 for a certain stock. If you thought the price for that stock will go below £190, you could bet any given amount of money, say £2 for every pound that the stock falls below £190. If the stock price after a week had fallen to £180 you would receive a £20 return from your bet. However if the value of the stock had risen to £205 after the week you would end up losing £30. This principle opens the door to tremendous gains but also immense losses due to the volatility of stocks.
Spread Betting Tips/How to Win
The most successful spread betters often have a few things in common. Not just a Ferrari, a Rolex and a penthouse suite but a specific strategy that lays out each aspect of their trading activity.
You wouldn’t go into a Football match without having some idea of how you’re going to stick the ball in the net, the same principles apply for spread betting. You won’t be able to develop a solid plan overnight, you should be patient and invest plenty of time and effort along with sufficient trial and improvement to find something that works for you. Building up your strategy is often overwhelming as it can be difficult to know where to begin, I suggest keeping things as simple as possible.
Take it Slow
One thing that is absolutely paramount to successful spread betting is to take it slow at the start. Needless money is lost by rookies as they don’t properly understand what they’re doing. It is imperative that you familiarise yourself with the ins and outs of spread betting before wagering anything, especially larger sums of money. It’s a good idea to watch the market, get a strategy in place and look for trades where the risk is small and the potential profit is large. Taking your time and making calculated decisions is the only way to make your wins bigger and your losses smaller.
Go Both Ways
It is important to remember that betting on stocks to fall is just as profitable as betting that stocks will rise. The value of a stock falling is sometimes easier to predict than it rising, spotting this early gives you a great chance to make more successful bets.
Research is key to successful spread betting. It’s important to have a solid knowledge of various markets along with a firm understanding of the companies you’re betting on. Most of your research can be done on the Internet, by reading the papers and by speaking to people in the know. Arming yourself with a good instinct and nurturing an appetite for risk will increase your chances of doing well.
Limit the Number of Markets you Trade
Choose a couple of areas to trade (or one), such as forex or equities, and stick with these. Learn everything about these markets and get a feel for how prices move. Developing a relationship with the markets you choose will help you stay on top of things.
When to Enter and Exit
As a trader you should always establish before the bet, how and when you will exit the trade. A simple entry point could be when the price crosses a moving average or when it bypasses the high or low of the last number of bars. Many inexperienced traders focus too much on trade entries. Jumping into a trade is simple, it’s the profitable exit that’s the difficult and most important part.
Always use a Stop-Loss
A stop loss is an order placed with your broker to exit the trade when it reaches a certain price. You should always employ a stop-loss on each bet you place. Some spread betting companies insist that you employ a stop loss on each trade that you make. If you weren’t to use a stop loss, in theory a stock could plummet and you could end up paying 100’s of times your initial stake. This could be disastrous and possibly seal the fate of your account. Where you place your stop depends on how much you are willing to risk and how volatile the market is.
Don’t Risk Too Much
As a rule of thumb it’s best to keep your risk low, especially while you’re learning the ropes. It may be useful to try and stick to a maximum of 1% risk per trade. If you don’t have a clear understanding of how much you could stand to lose on each and every bet then you shouldn’t be placing the trade in the first place.
Master Your Trading Psychology
When trading you may find yourself sitting on a loss, hoping it will break even so you can exit the trade. See a position move into a profit and take it, only to watch the value go up and up knowing you could have made more. You may feel the constant need to be trading or finding yourself adding to a losing position to try and make a profit, only to see the loss keep growing. These are all reasons why you need to work on your trading psychology. Fear, greed, excitement and dwelling on what could have been can affect your trading and no doubt will end up costing you substantial amounts of money.
Anyone can be a profitable better simply if they work hard enough and study the stocks. Many lack the tenacity to keep trying or get unnerved by initial losses, you need to enjoy taking risks, but also remain calm, calculated and patient. Keeping things simple and not staking too much will allow you to learn the ropes, find our feet and hopefully set you on your way for a profitable career in spread betting.