What is Spread Trading? Spread Betting Explained

What is Spread Trading?

Financial spread trading is one of the most popular forms of trading in the UK. It involves placing a trade on a particular financial instrument such as an individual stock or share, commodity, or market index such as the FTSE 100, Dow Jones, Nasdaq, S&P 500, Cac, Dax, Nikkei, and Hang Seng.

Its popularity is growing rapidly around the world mainly thanks to the growth of the internet and personal computers which has given rise to the number of online Spread Trading Platforms which are now available to the individual trader. The internet has also made readily available the wide range of continuously updated information, statistics and charts required for analysis and decision making.

Spread trading is often called “spread betting” because you are basically betting whether a stock, share, commodity or index is going to go up or down in price.

‘Buying’ in a rising financial market (going LONG)

You can go LONG (buy) if you believe a share, commodity or index will rise in value, and in due course if you are correct, you sell for a profit.

‘Selling’ in a falling financial market (going SHORT)

You can go SHORT If you believe a share, commodity or index will fall in value, and if the prediction is correct, you can buy the instrument back at a lower price, for a profit.

In layman’s terms please, can you explain how to spread bet and the best online sites for doing so?

Say the FTSE is quoted at 5046-5047. If you think it’s going up you buy at 5047, using a sell stop somewhere below to protect the account. If it goes the right way you make a profit for every point, to the value of the trade. Selling is the opposite.

So if you buy £10 per point and it goes 20 points you are up £200. You close the trade by selling for the same value you bought at.

Firms should have a one point spread for FTSE, and allow a minimum of a pound a point. I have an account with Ayondo. The platform is good and I think they are indeed ‘fairer’ than most. I’ve used CMC and made some money but didn’t like it much.

There are many advantages to spread trading; one of the main benefits is that there is no limit on how much profit you can make yet there are simple strategies you can implement to limit your losses.

Another major benefit of spread trading is that it is a leveraged product which means your money can work much harder for you, producing higher returns. This means that the deposit – say 10% – returns exposure to a comparatively much larger portion of an underlying instrument than if you purchased it directly through a conventional broker. We will cover this in detail later on.

Few other financial trading methods can provide such substantial returns for so little money needed up front. Plus, you can trade from the comforts of your own home. All you need is an internet connection, and an online spread trading account. And your profits won’t be taxed* like other traditional gains from the stock market.

*Spread Trading is tax free in the UK at the time of writing. Please check updated tax laws in the United Kingdom and those in in your own country.

There is also a vast range of instruments you can speculate on. The markets you can spreadbet on include shares listed on stock markets around the world; indices such as the FTSE 100 (UKX), the Dow Jones Industrials and the Nasdaq; sectors such as mining or retail; currencies; interest rates; commodities such as oil, gold and pork bellies; and debt instruments such as bonds.

Spread trading is particularly hot right now because you can profit from both rising and falling markets, allowing you to take advantage regardless of whether a share price is going up or sliding down.

So if the markets take a fall because of a government announcement you can profit from that decline or if the news is good and the markets rally you can profit from the rise too. The current state of the markets at the time of writing in the last quarter of 2010 means there are plenty of trading opportunities in both directions.

But it needs to be pointed out that although it’s easy to make a lot of money through spread trading, it’s also possible to lose money. You need to know what you are doing. Any kind of trading always involves risk, but this guide will show you how to minimize that risk through thorough research, informed decision‐making and good money management.

This guide will provide the essential education needed for you to quickly implement the basic skills of spread trading and start you on your road to trading profits.

Some of the main benefits of spread trading -:

  • Tax Free
  • Work from Home
  • Flexible lifestyle
  • All online
  • No profit limit
  • Can limit risk exposure
  • Profit in both rising and falling markets
  • Own boss
  • Leveraged product

To recap…

In financial spread trading, you bet on whether a share like Vodafone, a share index like the FTSE100 or DAX, or a commodity like Gold or Oil is going to go up or down in price.

These great opportunities are now available to the average investor mainly because of the internet, which has opened the doors to everyone who can access the worldwide web, not only giving you a wealth of research data and intelligence, but also a platform through which you can trade. The internet also allows you the flexibility to make your trades from wherever you are whether sitting at home, on your lunch break, or travelling on a cruise ship around the Caribbean. The efficiency of the internet has also brought down the prices incurred by spread trading companies, which means more money for you.

And because you are trading on just the direction of a stock, you can become a highly profitable trader without ever owning a single share.

Spread trading is a form of a financial “derivative.” But while complex derivatives have become famous during the worldwide mortgage economic crisis, Spread Trading is considered to be perhaps the easiest derivative to understand. Simply put, a derivative is a financial contract whose value is derived from the actual value of an underlying asset‐‐be it the price of M&S or the price of Silver. This is key, because as it’s a price derived from those assets, it’s not the asset itself, and you don’t need to own a share of M&S or an ounce of Silver.