The Spread Betting Strategy

Inspired by Paris sporting methods, spread betting has become a true investment strategy for Forex traders. We therefore propose to look closely at this strategy that is easy to implement and has already proved its worth, notably in the United Kingdom where it has been used for several years.

Here therefore we will explain its operation in detail together with its advantages and disadvantages.

The operation of the spread betting strategy:

As indicated by its name, the spread betting strategy operates as a simple speculation on a financial asset such as a currency pair, or, why not, with CFDs, on shares or even commodities.

Spread betting has exactly the same function as classic Forex trading, the only difference being that here you speculate a precise amount per point won or lost. For example, if you believe that the EUR/USD currency pair will rise you may decide to speculate one Euro on each point on the rise. In the case whereby the EUR/USD pair falls, you will also lose one Euro per point lost.

As with classic trading, you may of course place ‘stop loss’ and ‘take profit’ orders to master the risks and objectives of your trades. There again, the broker will be paid from the spread with no hidden costs.

The advantages of the spread betting strategy:

There are numerous advantages to using the spread betting method for your investments on the Forex. Here are the major ones:

  • You have a great range of assets available to you as spread betting can be used on all the assets generally offered by the brokers.
  • This strategy is economically viable as, apart from the classic spreads, you should not have to pay any supplementary fees.
  • You can benefit from a high or low leverage effect to increase your potential profits.
  • You have the opportunity to speculate on the rise or on the fall of an asset and therefore make profits whatever the direction of the trend.
  • Finally, you know in advance how much you can make or lose as you yourself decide the amount you wish to allocate to each point won or lost.

The disadvantages of the spread betting strategy:

Of course, spread betting does not offer only advantages. Among the disadvantages of this method are the following:

  • Profits from spread betting can be substantial but this also incurs risks relating to losses, which is why it is important to use stop orders.
  • In accordance with the current regulations of certain countries, the profits made using spread betting may be considered as profits from financial products which are therefore subject to taxation.

Basics of spreadbetting

1. Spread-betting is gambling, not a kind of formal investing. All you have to do is to gamble upon the movement of price (may be rise or fall) of the stocks, index or a commodity. You must note that if you are lucky enough, spreadbetting company might end up grabbing all your money and you might face unlimited losses.

2. One thing about spreadbetting that would make you smile is that its free of capital tax. Well, it might sound like a huge advantage but you must never forget to remember before analyzing the losses you might encounter.

3. Now coming to the process of trading, imagine a stock which has (selling) and offer (buying) price for the FTSE 100, with 1,012 and 1,016 respectively. Let the opening price of the stock be 1,016 and the closing price be 1,050. So now the difference between the two prices is what you trade on. To be more precise, the difference between 1,050 and 1,016 is 34. This difference is called spread. Say you have betted GBP 10 for every spread, then the profit you earn is GBP 340. Remember if the market goes the other way, you might end up losing the same amount.

4. In my honest opinion, it is always better to start with a demo instead of going for live trade right away. With lots of investors eager to do spreadbetting, companies are now offering virtual trading platform where you can trade using virtual money and get an idea how this really works.

5. Stop loss, one of the most beneficial features of any trading is available in spreadbetting as well. Stop loss always minimises you losses and reduces the risk of losing your entire investment.

6. You can also use spreadbetting as a long term trading instead of playing it as a short time gamble by betting with small values so that the reduction in prices doesn’t make a huge impact on you investment.

7. When you start to think to go for live spreadbetting, try to gather some past datas about the stock you are going to invest by analyzing its past behaviour as the risk involved in spreadbetting is too high.

8. In some instance, the spreadbetting trading use hedge to keep themselves immune from market ups and downs. For example, if you have invested GBP10,000 in a FTSE 100 tracker fund and if you are concerned that the market would fall, then what you can do is to hedge your position by selling the index on spreadbet. If the close of index is at 5386 then you can sell at GBP 1.86 which is nothing but (GBP 10000/5386). Now for every point the market falls, you can earn GBP 1.86 in order to cover all your losses while hedging.