Before you begin trading via spread betting, you need to understand the basics. I will look what spread betting is so you can make an informed decision on whether it is for you and how to make the most of its best aspects.
In the following section I will look at:
Understanding where Spread Betting lies in the financial spectrum
How you have participated in the markets before and your goals as a trader
Taking the fist steps to trading successfully in the equity and indices markets
When you spread bet you are backing your judgement on whether a market will go up or down without actually buying or selling the underlying physical asset or security. Therefore it follows the product we are dealing with is derived from pricing elsewhere hence, the name financial derivative. This is essentially what type of product spread betting is, a financial derivative.
Spread betting is possibly one of the most simple derivatives and this makes them accessible to a large audience. Take the following example:
1. I think shares in company x (say a supermarket) will go up by 10p:
2. The first thing I do is think about how much I want to risk, say £100.
3. I can go £10 in profit for every penny the shares go up so I say I'm longng (expecting a rise) the shares at £10 per point.
4. The shares only end up going 4p so I make £40.
5. The equivalent real share trade would involve me buying 1000 shares to make £40 (1000 x 0.04p).
Note: You will find platforms providers ebable you to trade most of the companie you are interested in. See 'Platform Providers' section.
However, lets look at what would happen if the shares went down 4p:
1. The opposite happens so you would lose £40.
2. The shares drop by 4p and you will see your pstion is in the red and you are losing money.
3. You may decide to close the trade when you're losing or keep it open in the hope the price will go back up and you'll recover a loss.
So when you get it right it can be a welcome boost in profits and when yiu get it wrong, well you want to have had a stop-loss in place in order to minimise losses.
Guranteed stop-losses give you a definitive idea of the most you can lose so they may be a good idea if you're new to spread betting.
The platform providers section will give you detials of providers I know offer these, very much like a stockbroker allows stop loss points.
