Spread Trading Basics

SpreadsFinancial spread trading is a trading method of backing a view about the direction of a market without having to own the underlying stocks, commodities or other securities that are traded on them. For an increasing number of traders and investors spread trading has become an attractive and cost-effective method of trading shares.

Most people have owned shares or are familiar with the concept of owning shares. These people will find spread trading fairly straightforward. For example, suppose you have £1,000 to invest and decide to buy 200 shares in Barclays Bank at a price of 500 pence a share. Three months later the shares are now trading at 550 pence a share and your investment is now worth £1,100. Alternatively if the shares are now trading at 450 pence a share then your investment is only worth £900.

Now if you were spread trading you can place a trade with a bet size specified in £/point. As this share is traded in a point size of 1 point = 1 pence, then we could place a spread bet of £2/point when the price was 500 pence. If the price rises to 550 pence then it has gained 50 points and at our bet size of £2/point, that gives us a profit of £100. Alternatively if the share price falls to 450 pence then it has lost 50 points and so we have lost £100.

However, in the example you can clearly see that with traditional shares we would have invested our £1000 and it would all be at risk. We would also have had to pay stamp duty and brokerage fees, and if we made sufficient profit then we would have had to pay income tax.  To trade 1000s of financial markets including currencies, indices, shares and much more from your PC or your iPhone please check the table below -:

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Trade Sensibly. Please note that between 74-89% of retail investor accounts lose money when trading CFDs, forex, and spread betting.

The scope of this article is to provide a brief introduction. If you would like a more comprehensive understanding of how spread betting works visit this website. Just remember that with this form of trading we DO NOT have to invest the full amount, only the ‘margin’ to cover our bet size. We can also limit our risk by setting a STOP LOSS, at the price level we accept that the trade has failed. This will automatically end our trade and prevent further losses. There is also no Tax to pay (Tax laws may change). On every trade there is however, the Bookmakers ‘Spread’ costs. This is the cost of each trade and it works just like a currency exchange at the airport. They quote a ‘buy price’ and a ‘sell price’ and the difference is the ‘spread’. When you buy, you have to buy at the higher price and when you sell you have to sell back at lower lower price. The difference is the bookmakers spread or profit. In the example of Barclays the prices may be 499/501, so even if the trade does not move, then the bookmaker will make a 2 point ‘profit’.

Another very important aspect of Financial Spread Trading is that you can bet that a share will go down. If you want to take full advantage trading spread betting you need to be flexible in your approach. Shorting spreadbets as part of your overall investment portfolio gives you the ability to benefit directly from a falling market. In the example above if you believed that Barclays share price would fall, then you could place a ‘down’ or ‘sell’ trade, and in the example if the share price fell to 450 points then you would have 50 points profit, which would be £100, if you placed a -£2/point trade. You can also use short trades to defend the value of your physical share holdings, and even help smooth the day-to-day fluctuations of your trading portfolio.

The main challenge for anyone new to it is to come to terms with the idea of trading on margin. This is because with spread trading you only need a fraction of the capital required for share trading, to have the same amount of exposure (profit or loss) in the market. This is called ‘leverage’ and should be used with care! Without a strict system/plan and careful money management (bet size and stop losses), it can be tempting to over trade and take big risks. In terms of financial risk, think of putting your money in the bank as ‘walking’ (small but easy interest), investing in a fund as ‘riding a bike’ (variable but higher returns), share trading would then be ‘driving a car’ (everyone has a crash at sometime!), and spread betting would be ‘driving a Racing Car’ (takes time to learn the skill and then there is no stopping you!) Clearly you have to learn each stage, and I hope when you got your driving lenience you didn’t get straight into a Racing Car! Start small and carefully and there is a huge profit potential, but race ahead and you will probably crash and burn.

When you are learning a new subject, particularly one like spread trading which is vast and yet simple, the complexities you face will take time to become clear. You will know when this happens. In the interim however utilise education, experience, education and more experience.The road can be rough and confronting and there are many unseen things ahead, so you need a plan for those and that plan is risk management.

UK Spread Betting: Trading the Financial Markets

Welcome to www.onlinespreadtrading.co.uk, your definitive guide to financial spread trading. Our aim is to explain how spread betting works and encourage people to enjoy this popular form of trading. Whilst millions of people like to have a flutter with the bookies, many are reluctant to try spread betting because they feel it sounds too complicated. This couldn’t be further from the truth, as spread betting offers a fantastic way to enjoy betting on sport or financial markets, with the possibility of fantastic winnings (although these could be fantastic losses too if you aren’t careful!). Our guide will explain how spread betting works and what you need to know to make money. Spread betting offers a number of key advantages including tax free profits* and high leverage, giving it a distinct edge over other conventional forms of shares trading.