Trade the UK markets and… many other global markets
A guide to financial spread betting with a look at the pros and cons, the financial spread betting companies, reducing your risk, trading orders, market commentary and how to trade.
- Financial Financial Spread Betting
- Financial Spread Betting Companies
- Financial Spread Betting Risks
- Financial Spread Betting Markets
- Financial Spread Betting Orders
- Reducing Your Financial Spread Betting Risk
- Worked Examples
What is the Spread?This brief trading video talks about what the term ‘spread’ really refers to in ‘Spread Betting’:
Why Spread Betting?Financial spread betting solves a lot of problems and this is especially true when it comes to access to World markets and the simplification of tax issues. There are some useful benefits:
- I like that you can close a profitable trade and bank a profit but also that you can close a losing trade and limit your losses. Being able to part-close a trade also offers an interesting angle, i.e. closing part of your trade but keeping the rest of it open. This can be used to help manage your risk.
- The ability to speculate across an extensive range global markets. Many spread betting providers offer countless markets which normally include stock market indices, stocks and shares, foreign exchange, commodities, bonds and interest rates.
- Financial spread betting is tax free*, there is no capital gains tax, no income tax and no stamp duty to pay on spread bets.
- You can go long (ie buy) or short (ie sell) of a market. This means that you’re able to make a profit with markets which are falling or rising.
- Financial spread betting is commission-free and there are no brokers’ fees (the spread betting companies’ fees are built into the prices).
- You can trade via mobile phone applications, online and over the phone.
- The vast majority of new trades are processed automatically, or at least within a matter of seconds.
- When the closing bell sounds, not all financial spread betting markets will close. Whilst the New York, Frankfurt and London stock exchanges may close many important markets remain open. Companies like Financial Spreads offer 24 hour trading, 5 days a week on key markets like the FTSE 100, EUR/USD, gold and crude oil. Note that with 24 hour trading, out-of-hours pricing may be applied, ie the spreads will sometimes be wider.
- Spread betting certainly has it’s risks (see below) but there are a few steps you can take to limit your potential losses. One example is that you can add a Stop Loss to your trades. If a market moves against your position then the Stop Loss will close your spread bet and prevent you from losing any more money. Note that not all Stop Losses are guaranteed. Also see financial spread betting orders.
- Some of the spread betting firms have started to provide free financial data for their clients. The data available can vary; however, it can often include Events Calendars, Market Heat Maps, Technical Analysis and Company Specific Data.
- The fact that some markets can be traded 24 hours a day, 5 days a week, sets spread betting apart from more traditional stock trading.
- Another advantage is that there are a wide variety of ways in which to make trades; online, over the phone, or even on some new mobile applications.
Where to Spread Bet?The Financial Conduct Authority (FCA) regulates the UK based spread betting companies. This tends to ensure a certain level of consumer protection.
With regulated firms like FinancialSpreads.com and IG (was IG Index) you can trade certain markets 24 hours a day, including key Forex and Stock Market Index markets. You can also trade more traditional markets such as Gold, US and UK shares and so on.
So whilst there are many plus points, you also need to remember the potential downside. Financial spread betting does carry a high level of risk. Before trading, ensure that spread betting matches your investment objectives. Familiarise yourself with the risks involved. Seek independent advice if necessary.
How to Spread Bet
Financial Spread Betting CompaniesIn the table below we have listed some of the largest financial spread betting companies.
How do you know which spread betting company is right for you?
Rather than give you a list of spread betting companies, here are a few suggestions on what you might look for when choosing a company to trade with.
Many UK investors pick a firm that is authorised and regulated by the Financial Conduct Authority (FCA), this means client funds are segregated from “the company’s funds” and that the investor is protected by the Financial Service Compensation Scheme should the company in question go bankrupt.
Note that whilst you do not pay direct commissions with spread betting, many investors often don’t realise that the firm’s fee or commission is built into the spread/pricing.
The smaller the spreads offered by the firm in question, the lower your trading costs. Note that it has become quite a competitive market and a number of operators, like FinanciaSpreads, now offer spreads as low as 1 point on the FTSE 100 index, DAX 30, EUR/GBP, EUR/USD and USD/JPY.
Note that most firms listed on this site offer a broad selection of financial instruments including forex, many UK and international shares, stock market indices and commodities. For more details see: spread betting companies.
If you are less familiar with spread betting then choosing a firm that offers demo accounts can be helpful. Demo accounts are free accounts, with virtual funds, where you can practice trading the markets, try trading orders etc.
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|24 Hour Spread Betting?|
|Stop Losses Available?|
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Financial Spread Betting RisksFinancial spread betting is a leveraged form of investment, it carries a high level of risk to your capital and can result in losses that are greater than your initial investment.
Please ensure that financial spread betting fits your investment needs as it might not be appropriate for all classes of investor.
Before you start trading, make sure you fully appreciate the risk involved. Make sure that you only spread bet with funds that you can afford to lose.
Where you feel it is required, seek independent advice.
Financial Spread Betting MarketsSpreadbetmagazine.com offers hundreds of spread betting guides on individual markets. Each spread betting guide comes with detailed trading examples, where to find charts, which companies offer which markets etc. For more information see:
- Stock Market Index Spread Betting Guide
- Forex Spread Betting Guide
- Shares Spread Betting Guide
- Commodities Spread Betting Guide
Financial Spread Betting OrdersSpread betting can be risky and therefore, much like all your investing, only trade with money you can afford to lose.
To help you manage your risk, spread betting companies normally let you use a number of trading orders, the more widely used orders are:
Stop Loss – a Stop Loss is a trading order designed to help an investor if they are losing money on a trade. A Stop Loss order can close and settle your trade if the underlying market moves against your position and through a certain level. You can generally state the level that the order is set at.
Be aware that Stop Loss orders aren’t completely guaranteed, in the event that the market ‘gaps’ or jumps across the price level you set your Stop Loss at, then your trade will be closed at the next traded price.
Guaranteed Stop – a Guaranteed Stop order works just like a standard Stop Loss however the closing price level of your financial spread bet is guaranteed. So even if the underlying financial instrument you are trading gaps over the level of your Guaranteed Stop, your spread bet will still be closed at the price you selected.
Keep in mind that if you want to add a Guaranteed Stop to a trade, there is generally a small premium for this extra insurance and, generally, it is a marginally larger spread/price.
Both types of Stop order are important considering the fact that spread betting is leveraged and comes with a high level of risk. These orders help to lessen any unwanted shocks.
Limit Order – a Limit order is designed to assist you if you’re making a profit on your trade. A Limit order would close your spread bet if and when the market you are trading moves in the way that you successfully forecast and through a certain price level. In most instances you’ll be able to state the level at which your Limit order is set.
Put simply, Limit orders will close and settle your trade to lock in your profit. A good number of traders always use Limits because they can help to prevent you from getting carried away and not closing your trade according to your plan.
|Stop Losses Available?|
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Reducing Your Financial Spread Betting RiskIt doesn’t matter whether you are using CFDs, spread bets or investing in stocks and shares, you can lose money on your investment.
With spread betting there are two simple ways of reducing your risk:
- Small Stakes
- Stop Losses / Guaranteed Stop Losses
Small Stakes – with most spread betting companies you can trade with smaller stakes such as £1 per point.
To gain a little exposure you could just trade the UK, US or German stock market indices, ie speculate on whether the FTSE 100, Dow Jones or DAX 30 etc will rise or fall.
If you speculate on the FTSE 100 to go up, with a £4 per point stake, and it goes up by 60 points then you would make 60 points x £4 per point = £240.
Of course the market could go against you and rather than going up by 60 points it might drop by 75 points. So with your £4 stake you would lose 75 points x £4 per point = £300.
Note that you can trade the markets in Dollars, Sterling or Euros. If you want to trade in Dollars then 60 points x $4 per point = $240.
Stop Losses / Guaranteed Stop Losses – naturally all investors want to reduce their losses and, as discussed above, with financial spread betting you can limit your losses without impacting your upside.
With spreads companies like CMC Markets and FinancialSpreads.com you can add a Guaranteed Stop at let’s say, 45 points.
If you were betting on the FTSE 100 then your bet would be closed if the FTSE 100 moved against you by 45 points. Therefore, instead of losing £300, you’d only lose 45 points x £4 per point = £180.
In addition, if you had correctly predicted the market direction then your upside would still be £240 if it moved 60 points or £400 if the FTSE 100 moved up by 100 points.
So what is the catch? As discussed previously, there are risks. Nevertheless, perhaps we should talk through how a trade works in more depth.
Share Trading v Spread BettingIf you trade shares on the stock exchange, you have to pay commissions on every trade. With spread betting there is no direct commission. The commission is built into the ‘spread’, which is the difference between the buying and selling price.
Is it Gambling?While the name spread betting might lead you to think that this is a form of gambling, this is not strictly true. Spread betting in the UK is regulated by the Financial Conduct Authority (FCA), not the Gambling Commission. This an indication that even the UK government realises that there is a difference between spread betting and gambling.
However when looking at tax, spread betting is more like gambling in that spread betting is tax free*. There is no capital gains tax, no income tax and no stamp duty on spread bets.
Interest and Dividends PaymentsIn the past most spread betting contracts were on a quarterly basis. Such a contract would have a fixed expiry date and if you wanted to extend it, you had to ask to roll it over and pay a commission again; often 50% of the normal spread.
Most investors now use ‘daily rolling spread bets’, these contracts stay open as long as you want. The difference is that the spread betting company will charge you interest on open long positions and pay you interest on open short positions. The rate is normally based on the London Inter Bank Offered Rate (LIBOR) plus or minus a few percentage points.
On such a contract you will also be credited with a percentage of dividends that are declared on long positions, but you have to pay in a percentage of declared dividends on short positions.
Remember: Spread betting, CFDs and forex trading carry a high level of risk. You can lose more than your initial investment. These products are not suitable for all investors. Only speculate with money that you can afford to lose. Make sure you fully understand the risks involved and seek independent financial advice where necessary.