The following is a guest post
When many people think of spread betting, they’ll think of gambling on sports results, and how strongly one team has performed against another. In reality however, there’s a whole other side to spread betting that a lot of people don’t know about, though it is rapidly increasing in popularity. What we’re talking about is financial spread betting, which is a form of financial trading, just like stocks and shares, or buying and selling currency. It’s actually a very straightforward way of speculating on the rise and fall of the price of an asset. Here is spread betting explained.
In short, spread betting is when you wager an amount per percentage point that a price moves by. If you believe that the price is going to rise, then this is the direction in which you bet. The reverse is true if you believe that the price is going to fall. For each point that things go your way, you win more money, and vice versa, meaning huge profits can potentially be made with a relatively small investment.
Each percentage point (also known as a pip) is generally 0.0001, which is a value that is likely to change constantly, particularly with volatile markets. This means that with spread betting, things can be quite fast paced, and large amounts of money can be made and lost quickly. This of course depends on how much you wager; some companies will allow smaller bets than others. Margin is important however; you don’t necessarily need to deposit the full amount of your wager to begin a position, you can use leverage to amplify things, though it’s essential that you remember that this can also increase your losses.
Spread betting is called spread betting because there is a gap between the actual value of the asset, and the amount at which you open the position. This is where the brokers earns their money for handling the transaction. For example, a share might be at 23.6748, but if you buy into it, you might not actually start realising any profits until 23.6750.
Spread betting is a product that can be used with just about any financial asset, but by far the most popular is in the forex market. Thousands of traders from all over the world speculate in which direction one currency might move against another by wagering money on pips.
One thing to be aware of with spread betting is that it is not permitted in all countries, most notably in the United States. This is because it is an over the counter product, meaning it is issued directly from a broker to a customer, rather than going through a regulated exchange. Fortunately however, in the countries in which it is widely used, spread betting is classified as gambling, and is therefore completely tax free. This is a real bonus when trading large amounts.
Though some may classify spread betting as gambling, it should not be treated as such. It is simply another way of speculating on the financial markets, and all of the usual rules apply. Ensure that you’re fully clued up, act only when you’ve got the signals to do so, and always mitigate risk where possible. For the world’s most successful traders, spread betting is a profession, it is not a hobby.