Spread betting is one method professional investors implement to turn huge profits. However, this is a style of investing that carries incredible risk and takes serious time and study. Spread betting is not for the casual investor for it can easily be as much gambling as investing.
What is spread betting
Spread betting is a style of investing where you are not actually buying or selling the actual underlying investment. You are investing in it’s future movement. Essentially, if you believe that a particular investment will rise, then you will place a buy bet on the instrument. If you believe that it will fall, then you place a sell. The risk is that you are on the hook for the price of the bet if the investment turns against you. In addition, spread betting is traded on margin. This means that you are only placing a deposit when you open a trade that is only a percentage of the total. But you are liable for the full amount. The danger is that you are betting with money you may not have.
Margin Call
This is the big danger of a spread bet. If the investment moves in the wrong direction, you may have to pay additional money over your initial deposit. This means that you should never use all your available funds to open your spread bet. If you can’t pay the margin, then you may be forced to close at a loss. Some people have lost all of their money on this gamble.
Advantages of Spread Betting
At the same time, spread betting can result in huge profits. If the investment moves in the direction that you predict, you can stand to make a lot of money.
Many investors are attracted to the ability to invest only a small percentage on a spread bet, requiring only a small initial investment for the possibility of a large gain.
In addition, this kind of trading is suited towards short term, quick investments since you are betting on quick market movements. This is ideal for day traders who don’t often take long term positions.
Finally, you can place a spread bet on a large range of investments. Spread bets can be placed on instruments such as:
- Stock market
- Commodities
- Currency
- Futures
- Interest rates
- Bonds
Spread Betting Tips
If you are considering spread betting, keep in mind a few tips.
- First off, study your investment carefully. You need to treat your investments seriously. There is a very fine line between investing and gambling when you are spread betting. Put together a plan and create a careful strategy for the markets that you want to consider.
- Consider your risk before you invest. You need to plan ahead in case of a loss. Don’t invest all your money and use stop loss orders to limit your risk to levels that you can afford. In particular, plan your stop loss limits in advance so that you always limit your risk.
- Set up a practice account so you can practice with virtual funds. Many spread betting companies offer demo accounts where you can practice with virtual money. Practice until you become more familiar with spread betting. This way you can test your research and theories before putting any real money into play. It will also help you understand the risk and rewards of spread betting better.
- Don’t get greedy. One big problem for many investors is that they get greedy. This can lead to placing bets that you can’t afford to lose. Also, your emotions can easily become involved and it becomes difficult to manage your risk. Greed has been the downfall of many investors.
- Stick to the markets that you understand. It can be tempting to venture into the latest trending market on the dream of extravagant profits. But you tread into dangerous waters. Stick to the markets that you understand well.
These are just a few tips to help you manage your risk. Keep in mind that being a careful investor is the key to success when you are engaging in spread betting.
Richard is a full time professional, husband, father and blogger juggling all the responsibilities of life and running a blog. Richard enjoys writing about life and online money matters.
