What is SpreadBetting? There are many ways you can place a trade on the financial markets and many products you can trade. You may hear your friends talking about trading Stocks and shares via an online platform (Especially with the recent reddit share trading stories we’ve been hearing recently)
You may hear people talk about trading Forex, FX or the foreign exchange markets. Buying ‘Cable’ or selling ‘Euros’.
You may hear of investors in gold (XAUUSD) and people punting the oil markets.
All of these products are available on different platforms and are available to trade in different ways. Options, Futures, Forwards, Spot, CFD and Spread–bet are just some of them terms you may have heard or may cross at some stage in the near future.
Whilst each variety of trading method mentioned above is different, some have advantages (such as the ability to buy something at a time in the future at a pre-determined price – A future) some have potential disadvantages (such as being riskier – certain options come to mind)
In this article, we are going to talk you through one of the most popular and tax-efficient (if you’re in the UK! -) ways of trading – SpreadBetting.
There are various types of spreadbetting markets, but the one we will focus on in this article is financial spreadbetting (Which by all accounts in the largest part of spread betting in the UK)
Spreadbetting is a way of trading a product (in this case financial products such as shares or FX) without actually owning the underlying asset. Instead, you are taking a view (basically placing a bet) and that bet is whether you think a market will rise or fall in value.
The same terminology for other financial trading vehicles is used for spreadbetting. If you want to buy an asset because you think the price is going to go up – then you are placing an order to go ‘LONG’. Conversely, if you are looking for a price to fall you place an order to go ‘SHORT’.
What is Spreadbetting: trade examples
Lets look at a couple of example to show a spread-bet in action:
Lets say you are looking to Buy (go long) a share that is priced at 100.
And you are looking to buy £1 a point of that share. If the price increases to 110, then you have made a profit of 10 points.
10 points multiplied by £1 = £10 profit.
Now let’s imagine a trade scenario in which you have placed a trade that has gone against you and you have lost money.
Let’s say you think the price of EURUSD is going to rise so you place a buy order of £2 per point. At the time, EURUSD is trading at 1.1000
However, the price hasn’t risen as you thought it would and the current price is now sitting at 1.0985.
You have lost 15 points. 15 points multiplied by £2 per point = a loss of £30.
Hopefully the two examples above have shown you how its possible to make and lose money by spread-betting.
* Note that the above examples have been broken down into their simplest form. Often FX can be quoted to different decimal places and instead of points are named pips. A pip is the smallest amount a currency can change by.
What is Spread-Betting: Leverage
A big advantage of trading using spreadbetting is that you don’t have to deposit as much to place your trade when compared to physically buying the stock itself. This is achieved by using leverage.
Leverage is essentially the borrowing of funds from the broker to enable a trade to be placed – Usually so the trader can place larger trades without having to fund as much in way of margin.
This means you can essentially make more money as the movements in the underlying market you are trading are magnified. HOWEVER, be sure to keep in mind that this works on the downside too. Ie –losses are also magnified!
You will usually see leverage displayed as a ratio. Let look at a few examples
- 100:1 (This means only 1% margin is required)
- 200:1 (This means only 0.5% margin is required)
Always check which leverage your broker offers and which leverage suits your style of trading. And keep in mind that leverage is a magnification of both the upside and the downside.
What is Spread-Betting: Symbols/Markets
Here’s a quick shortlist of some of the more popular markets to trade via spreadbetting:
- FX (Such as GBPUSD and USDJPY)
- Stocks and Shares (Such as Apple, Tesla and BT)
- Stock Market Indices (Such as the Dow Jones or the FTSE 100)
- Metals (Such as Gold and Silver)
- Commodities (Such as Oil and Coffee)
What is Spread-Betting: Margin
Margin is the initial deposit of funds you make to place your trade. As mentioned previously in this article, you don’t have to fund as much initially when spread-betting as you when physically buying a share because of leverage. You may have heard of the term ‘Margin Call’ (Or even seen the film!) we will get into this shortly.
There are 2 main types of margin you will need to familiarise yourself with. Initial and ongoing/maintenance margin)
Initial margin is used to open the trade itself and maintenance margin is used to fund the ongoing Profit and loss of that trade or number of trades.
A Margin Call can be sent via the platform, an email or many other kinds of notification. It’s basically an alert to tell you that your margin is running on the low side and that you should top up your funds or hedge your positions if you are looking to remain in the trade or trades.
If you do not top up or hedge, and the markets you are trading in continue to move against you, then it is likely that soon after, the broker may close your positions. They may do this by closing the most recent trade or the biggest losing trade first. Its something that will change from broker to broker so you should find out before you place your first trade.
What is Spread-Betting: Spread-Betting Charges
Often when using spread-betting as your trading vehicle, you will notice that you can place your trade (Long or Short) and you don’t seem to be incurring any charges or paying any commissions.
There is nothing shady going on here. It’s just that the broker is effectively making their money in the spread.
What is a spread? Its just the difference between the sell and buy price that you see on your screen. Spread-betting spreads are typically wider than other spreads as the charges are all included here.
You may have heard of a spread being named in different way. Bid and Offer and Bid and Ask. These are just market terminologies.
You buy at the Offer Price you see on your screen.
You sell at the Bid Price you see on your screen.
And the spread – Is simply the difference between those 2 price points. Easy!
What is Spread-Betting: Orders
You can place various orders within the market and these are particularly easy to use when trading with an MT4 broker. We will run through the most basic of orders that get you into a trade and also get you out!
- Stop Loss – This is an order that is mainly used to limit the losses on a particular trade. If you bought a share at 100p and you didn’t want to hold that position anymore if the market dropped to 90p. Then you would set your stop loss at 90 and your position would be closed if the market dropped below that price.
- Take Profit – This time we look at take profit (TP) which is effectively the reverse of a stop loss. If you have bought the same stock at 100p you might want to exit the trade at 120p as you don’t think it will get much higher than that. Therefore the system will automatically close your trade when the market hits 120p!
- Buy and Sell Limits – These orders are used to place trades IF a market reaches a level of your choosing. A limit order is used when you want to place a trade at a better rate than its currently trading (The market rate) For example if EURUSD is trading at 1.0100 – you might only want to buy it if it dips to 1.0050 therefore you would place a Buy Limit Order in the system. Inversely, if you wanted to sell EURUSD but only if it reached a price point of 1.2000 – you would place a Sell Limit order.
- Buy and Sell Stops – These orders are used to place trades if a market moves through a certain point – but you aren’t looking for a better price than market here. You are generally looking for some momentum in a certain direction before you place your trade. For example if XAUUSD (Gold) is trading at a level of $1800, you might think that if it breaks through $1810 then the upside potential is exciting – so you place a Buy Stop order at $1810. Vice versa, if you think that a trendline at $1780 is offering good support and a break of that trendline could result in a large move to the downside – you can place a Sell Stop order to catch that move lower.