Spread Trading Advantages

Spread trading is a leveraged tool that given the investor the opportunity to back their judgement on the direction of a financial market. Spread bets (or spread trades) are an increasingly popular traded instrument that allows for speculating on the movements of the financial markets.

Spread bets are essentially a stock derivative product that enables traders and investors to take an opinion and participate in the price movement of an underlying share or stock index without taking ownership of the underlying instrument itself.

Trading spreadbets is a simple and instantaneous trading option, with no commission on all instruments apart from a bid-offer spread. Spread betting companies take the price of an underlying market and add a ‘spread’ to that price. The spread is the difference between the sell and buy price. Spread bets are regulated by the FSA (Financial Services Authority) and this offers a number of benefits.

Benefits of Spread Betting

• All your profits are free from UK capital gains tax and income tax.
• Margin Trading: Leverage is an efficient way to utilise limited capital – you can have just as much market exposure for a fraction of what you would have to pay for real shares.
• You are afforded a wealth of protection by the FSA, alongside the peace of mind of knowing that you have a legal right to your winnings.
• The ability to go long or short or hedge easily: Make money from both rising or falling prices. With spread betting you can easily profit from a falling market just as easily as a rising one. If you believe that a market will fall, you can take a spread bet to short sell the instrument with the expectation that you can close your position at a later date at a cheaper price.
• As a beginner, there are companies that allow you to trade with as little as 10p per point, giving you the opportunity to develop confidence and experience.
• Some spread betting companies offer guaranteed stop losses to limit your loss.
• No commission or stamp duty to pay. The only charge is the spread betting company’s dealing spread.
• Access Many Markets: Gain exposure to thousands of individual shares, indices, commodities and forex pairs from one spread betting account on a single platform. Spread bets mirror the changes of leading equity markets (of global exchanges). Trade the FTSE 100, Dow Jones 30, S&P 500, Hong Kong Hang Seng and others!
• Extremely Tight Spreads: Spread betting providers nowadays compete with each other on price ultimately translating into better bid-offer spreads for us.

One argument often put forward in favour of spread traders is that they allow the possibility to gain exposure in global markets easily at very competitive prices. As opposed to seeking a local broker that allows you to invest in offshore funds, you can spread trade the likes of Apple or McDonald’s much more easily than if you were to seek to buy the underlying stock.

What are the main advantages of trading spread trades? You can trade short and long, cost-effective entry into trading, lower brokerage costs, Spread trades are traded on margin.

Spread betting carries a high degree of risk which is why getting educated is the first step to overcoming such risks.

In practical terms, investing in stocks through spread trades offers similar profit / loss opportunities as when trading stocks in the traditional manner. However, there are certain powerful advantages to consider:

Gearing: Spread trading allows traders to leverage an investment up to 20 times under normal conditions. For aggressive, risk-taking investors, the ability to leverage the investment is a principal benefit of the product. Of course, the higher the level of gearing, the greater the loss or gain. Therefore, traders must be clear about the risk of trading in leveraged securities. In effect, you can double or lose your money by a 5% move in the underlying stock or index, if you are fully leveraged on your deposit. So it is important that you choose your level of gearing carefully and only apply as much risk and money as you can afford to lose.

Short-selling: Short-selling is the act of selling a security that you do not own. Selling the market short is particularly efficient using spread bets. Investors do not need to borrow stock or pay financing costs for borrowing stock. By trading a spread bet, the speculator simply clicks the sell button and buys back the spread bet some time in the future. This is achieved by going short (that is, selling) a stock or index.

Instant trading: Serious investors look to spreadbets for the rapid trading capability they offer – instantly tradable prices. Using a spread betting company, investors can hit the price immediately when it reaches the level they seek, and receive an instant confirmation of the trade at that level.

Hedging the portfolio: Spread bets can be used to hedge an existing stock portfolio. Rather than liquidate or sell one’s physical stock portfolio during a period of falling prices or volatile markets, investors can quickly hedge potential risks by selling the equivalent position using spread trades for a short or long period, thus securing effective protection for their stock investments at little or no cost.

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