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A beginner's guide to spread betting

Speculating on daily market movements isn’t a game. Here’s a helpful guide to set you up for success

A woman spreadbetting online

We were told that the major recession of 2008 was a once-in-a-generation crisis. However, today’s cost of living crisis and a looming recession have brought economic concerns back to the forefront of many people’s minds.

With salaries failing to keep pace with inflation and many sectors moving to reduce pensions, individuals are looking for ways to create a stable financial future. Investing in the stock market is the first way to create an additional income stream that many people consider, but quite often without weighing up the risks.

Traditional investing is not for everyone. Younger generations are finding ways to invest that are usually reserved for bigger players who already have considerable capital at their disposal.

Even as we move towards digital options in most areas of life, investing in tangibles is still a classic move. Real estate is the most obvious option, though the bar to entry is fairly high. Art and collectibles such as stamps and coins are top options as well. More niche choices, such as investing in cask whiskey, are finding audiences as well.

Finding ways to play the stock market that do not involve investing heavily is on the rise as well. Lured by quick wins, many turn to day trading – an activity of high stakes that many find appealing.

While day trading software has made this accessible to most, it still requires quite a significant investment. In the United States, for example, anyone who makes more than three trades every five days is required to always have $25,000 in their account. This rule doesn’t apply in the UK, but it does highlight how risky and volatile this type of trading can be and the kind of capital you need to be comfortable losing.

There is, however, a particular way to speculate on daily market movements that tends to attract more risk-averse traders. Spread betting allows you to participate in day trading without actually buying any stocks. This article will give a brief overview of how spread betting works and why it is an interesting alternative to traditional investing.

What is spread betting?

Spread betting is a method of speculating on the daily market movements that doesn’t require the heavy investment of purchasing stocks. Instead, you are essentially betting on what the market will do.

When you select a stock or commodity to bet on, the broker will offer two prices. One of these — the bid price — is slightly higher than the actual current price of the stock. You buy in at this price if you think the stock will go up in value. The other — the ask price — is slightly lower than the real price of the stock. You select the ask price, also known as the sell price, if you think that the stock will go down in value.

Instead of having to pay the full price for a share, you buy in at a percentage of the cost. This is the margin. Margins make it possible to leverage a much larger position without putting all the money up front. Margin trading is less expensive initially and then magnifies either your returns (hopefully) or your losses (unfortunately).

When you are ready to select a broker to open a spread betting account with, look through the margins that they offer before signing up. Just as you search sportsbooks for the best odds when you are looking to place a bet on sports, it’s a smart move to do some research.

An additional benefit of spread betting over traditional day trading is that any profits that you make are not taxed. This can make quite a difference in what you take home if you are dealing in significant quantities.

Ways to manage risk

Obviously, the most significant way to manage risk is to only place small, safe bets that you are comfortable covering in the event they don’t pan out. Sometimes, though, you want to have a bit more fun with the market and be bold. Go big or go home is not exactly a sound investing strategy, but it can be very tempting from time to time.

Most spread betting brokers offer some tools to help you manage the amount of risk that you’re exposed to. These include standard stop-loss and/or guaranteed stop-loss orders. Both close out your position at a set point. The difference between the two is that the standard stop-loss order closes out at the best available price below the price you set while the guaranteed stop-loss order closes out at the exact price you’ve arranged.

Alongside a sensible spread betting strategy, both are good tools to keep you from throwing more money at losing positions, which is usually the case with the majority of inexperienced traders.

*Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

*Marketing for CFDs and spread betting is not intended for US citizens as it is prohibited under US regulation.

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