What is spread betting?
In simple terms, spread betting is a form of derivatives trading. When placing a spread bet, you speculate on the price movement of a financial asset, such as a stock or currency. This means you bet on whether the price will go up or down, rather than actually owning the currency.
When spread betting, you can go ‘long’ or ‘short’, meaning that you can bet on the value of the asset either rising or falling. If you’re right, you make a profit. If you’re wrong, you’ll lose money.
Advantages to spread betting
There are plenty of pros when it comes to spread betting, including:
Short-term opportunities
You can enter and exit hundreds of markets quickly because you’re not actually buying an asset outright. This can lead to more opportunities – however it can also lead to more losses.
No tax
Spread betting in the UK is not taxable and is free from both Stamp Duty and Capital Gains Tax. This is because spread betting isn’t classed as an investment but rather a speculative bet, since you’re not actually purchasing a share or asset, and just predicting whether the market price will go up or down. Spread betting providers, however, do pay tax.
Out of hours trading
Unlike other forms of trading, spread betting is a 24-hour market during the trading week (Monday to Friday), so you can trade any time of day that suits you. Plus, trading out of traditional hours can put you in an advantageous and profitable position.
Disadvantages to spread betting
Spread betting has many advantages, but like everything, it does have its downsides.
Potential for big losses
Whilst you have the opportunity to potentially make a lot of money, you also run the risk of losing a lot of money. With spread betting, you could lose all of your investment, and more, in a matter of minutes.
Not recommended for beginners
Spread betting is best left to professionals or those with plenty of experience. If you’re new to the world of gambling or trading, spread betting isn’t recommended for you. It takes skill and can be risky and complicated, so you need to be sure you know what you’re doing.
How to manage risks of spread betting
There are several risks to spread betting but there are always things you can do to mitigate these risks, such as:
Set up alerts
Some spread betting providers will alert you when a market reaches a certain level. This gives you more opportunity to act quickly.
Stop-loss orders
Stop-loss orders automatically end a trade once the market has hit or exceeded a target. You can’t completely eliminate risks and losses in trading but stop-loss orders are a great way to minimise those losses.
Learn the ropes
Ensure you have the right knowledge to participate in spread betting. The more knowledge you have on trading and financial markets, the better your chances of profiting are.
Should you get into spread betting?
If you’re an experienced trader, spread betting could be a good option. With short-term opportunities, no tax or capital gains, and out of hours trading, it does offer plenty of chances for gains.
However, there are numerous financial risks, and spread betting in particular can be incredibly risky. So, make sure you do your research and decide whether spread betting really is right for you.
