What risks should you consider before starting spread betting?

Let’s look now at some of the risks of spread betting. Spread betting has the potential for far greater profits or losses than you would be likely to incur in traditional trading. However, by using the tools available you can ensure that if the market is moving against you, your position is closed at an agreed point, placing a clear limit on your losses.

In my last post, I outlined some of the reasons why spread betting is a great way to try to make money from the financial markets. A lack of tax on winnings, the chance to make money off falling values and the fact that it is a platform that is readily available and easy to access for most people are all genuine positives of spread betting that you’re unlikely to find elsewhere and, in my humble opinion at least, makes it a very attractive prospect when considering investment vehicles.

But it would be extremely irresponsible of us if we did not also strongly emphasis the fact that, as with any other form of gambling, there are significant risks and hazards involved with spread betting. Believe or not, we really do not want to see anyone waste all their money by making bad decisions or getting into trouble by risking funds that they can’t afford to lose. So before you get started with spread betting (and I strongly recommend starting with a spread betting demo account before trying the real thing), take a few minutes to read through some of the risks of spread betting you should consider before you get started to avoid being a victim of them.

  1. This is not a ‘get rich quick’ scheme

Undoubtedly, big profits can be made from spread betting with the right combination of hard work and good fortune. But don’t get into it thinking it’ll turn you into a high-rolling market player overnight. It won’t. To be successful it will take time and effort, which brings me onto point two…

  1. Know your market

Simply setting up an account and placing a bet at random is not the path to spread betting success. You may get lucky once or twice, but in the long run, you are only going to make consistent profits if you know the market or financial industry you’re betting on inside and out, whether this be the UK 100 index, Wall Street, currencies or spread betting on commodities.

  1. Beware of emotion

Emotion is a spread bettor’s enemy. The unpredictability of the market and its consequences for your bank balance can lead to a rollercoaster of different emotions, from exhilaration and euphoria to panic and dejection. But if you let any of these influence your betting decisions, you’ll more than likely find yourself regretting it. Try and remain as objective and calculated in your approach to spread betting as possible.

  1. Losing streaks

Related to the above is one of the most common pitfalls that snares spread betters when they first start out – holding onto a losing position. When you see a bet isn’t going your way, it can be tempting to keep it open in the hope it will turn around, but most of the time, it won’t. Cut your losses and move on.

  1. Don’t bet more than you can afford to lose

This seems like an obvious point, but there are plenty of examples of people who have got themselves into trouble and built up debts by making losing bets they couldn’t really afford in the first place. Before you start, set aside an overall capital sum which you are certain of being able to pay should you need to – hopefully you will get to keep all of this and then some if you make good bets, but is good to have it there as a guarantee.

A spread betting company will require a margin for each bet you place. This is the minimum sum you must deposit in order to take a position and is usually worked out as percentage of an overall value of the trade. This is one of the factors that makes spread betting so attractive over other forms of trading as it means you do not need to stump up the full amount of capital that would be needed to physically buy the shares. However, keep in mind that if you only deposit the minimum margin for a position which ends up going against you, you will need to pay additional funds, so make sure that you have these in reserve if needed.

Spread betting on financial instruments can rewarding and the industry sometimes comes up with success stories of people who have made big sums through this form of trading. But please do consider these risks before getting started. Not only will it give you an idea of what to expect, it could help you make a healthy profit.