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Spread betting is not the same as gambling, it’s much more like trading, as you speculate on whether or not a company’s shares rise in value. Like any form of trading, there is risk involved, but it can be a great way to make a living if done right.
What is spread betting?
The basics of spread betting are fairly simple. Traditional investment involves buying a number of shares in a company, then selling them when they have risen in value. This requires a large initial investment to begin with, as individual shares are typically not worth much and their value only changes slightly.
Instead, spread betting lets investors bet on whether a share’s value is going to go up or down. Rather than owning the stake, you bid an amount per point the value moves. So if you bet £100 per penny a stock moves, and it increases in value by 30p, you will make £3,000. Of course, if the stock falls in value by 30p, you will have to pay £3,000 instead, so it is not without its risks.
For a detailed breakdown of spread betting, click here to learn more. However, the basics are simply that you choose a stock and bid the amount per point the stock moves, as well as a time limit for the bet. You can also set stop losses, that stop the bet if the value of the share ever falls below a certain amount. After this, it’s just a matter of waiting to see if your investment pays off.
Many people love spread betting, as it lets them trade their predictions on where the market is moving. If you have an eye for markets, enjoy data or have a good mind for spotting trends, it could be the right step for you.
Benefits of Spread betting
Firstly, all the profits from spread betting are exempt from tax in the UK in most circumstances. Unless you make extreme gains from it or it is your main form of income, you will not be taxed on profits .
One of the big benefits of spread betting is the ability to trade without a large initial investment. Spread betting still requires an initial investment to start. Often this is around 20 percent of the total value of the trade, but this can be different depending on the market in which you’re trading. However, this is much more affordable, and means you are not having to risk a huge portion of your savings to get started.
The downside, of course, is the risk. If a share moves in the opposite direction than you predicted, you could face potential losses. There are ways to mitigate this. For example, a stop loss cashes out your bet if the value of the share drops below an amount you set. You will have losses on the trade, but it stops the losses from becoming too high if a company’s value suddenly crashes.
Mitigating risk when spread betting
Risk mitigation is essential in the world of spread betting. No matter how good you are at trading, there will be times when you get it wrong. You can’t predict when a CEO will get caught in a scandal or a company will bring out a surprise product that boosts its value. There’s a reason that only about 125,000 people in the UK are regular spread betters.
Rather than hoping this never happens to you, you should work on the basis that you get some trades wrong. To mitigate this, you should make sure you are using stop losses and other tactics to reduce the amount you can lose. If you set things up so you can only lose a maximum of £10 (for example) per bet, then you can afford to have quite a high loss rate and still make profit overall.
Overall, spread betting offers you a world of opportunities to predict market movements, however there are risks to it. The key is to ensure you mitigate risks before placing any trades.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.
Tax treatment depends on your individual circumstances. Tax law can change or may differ in a jurisdiction other than the UK.
