Financial Spread Trading /Spread Betting Guide
Spread trading or spread betting is another way of making money by shorting (SELL) and going long (BUY) on the market. Just like options and futures, it is another derivative of the actual instrucement. Currently, under United Kingdom law, profit is tax free.
How Does Spread Trading / Spread Betting Work?
Unlike options and traditional buying and selling stocks, there is no physical stocks /shares to buy or sell. You basically bet on whether a stock or any financial product's price is going to be above or below a certain price within a certain period, like end of day, end of every quarter etc.
At the end of this trading period, you either win or lose which will be credited or debited from your trading account. There is no commission to pay nor any requirement to buy or sell the shares.
Let's say you were given a quote of daily FTSE100 cash price Sell (bid) 6091, Buy (ask) 6095.
You click on Buy if you think FTSE100 will finish the day higher than 6095. You click on Sell if you think FTSE100 will finish the day lower than 6091.
You enter the number of £ uk Pounds per point that you are willing to bet. You then enter the stop loss value, possibly just under your support lines values on the chart to limit your losses if the trade goes against you.
As it is a leverage product, you are required to deposit a certain amount in your account to open the trade(roughly 5 -10 % x price x stake ).
Each spread betting company has different margin requirement. Let's say CMC market, which is what I use require 50x initial stake and you place £10 per point bet on FTSE100 Cash Indice.
You will need £10 x 50 = £500 initial deposit to open the trade and some extra in the account in case it moves against you before the stop loss is triggered.
Let's say you went LONG (clicked on Buy), with £10 bet and were right, and FTSE 100 Cash finished the day higher at 6195. Your winnings would be:
6195- 6095 =100 points
£10 per spread betting point x 100 points = £1000
Conversely, if you were wrong, you would lose £10 x number of points. Let's say FTSE 100 finished the day down at 5095 and you did not set a stop loss. Your losses would be :
6095-5095= 100 points
£ 10 per point spread bet = 10 x £100 = £1000 loss. Ouch !
Spread Trading Margin Call
If you do not set up an automatic stop loss to get you out of a trade when it moves against you, and your account do not have enough money to maintain the trade open, you will get a call from your spread trading account manager/ help desk to top up your account.
If they cannot get hold of you, some spread betting companies will automatically close the trade for you at a loss, even though the market may have corrected itself say 1 minute later. If your account do not have enough money to cover the losses, you will be required to settle the loss and incur interest until it's fully paid.
Limit your Losses
If you have placed a stop loss at the time of / after opening spread trading bet, say at 6080, then your losses would be:
6095-6080 = 15 points
£10 per point spread bet = 10 x 15= £150 a lot of difference! See you don't lose your house if you limit your losses!
Spread Trading / Spread betting Entry And Exit Procedure
You do not have to glue to the screen to open and close the trade. You do this via
Buy Stop- You enter the long trade only if the price is above a certain price e.g Vodafone price is now 103 (bid) 105 ( ask ).
You want to buy when it's above 108. You click on BUY, change the order type to Stop, change ask price to 108. This trade is only open if the price hit that target
Sell Stop - You enter short position only if the price is lower than a specified price, e.g for the above Vodafone example, the price is now 103 ( bid ), 105 ( ask). You only want to short the trade when the price is below 95. You click on Sell, change the order type to Stop, then change the bid price to 95. This trade is open only if the price hit this target.
Buy Limit- You place a buy order to enter a long position when the price is better than what it is at present e.g Vodafone price is now 103 105, you only want to buy at 100. Your buy trade will only be opened when the price hit that target.
Sell Limit- You place a sell order to short the market when the price is better than what it is at present e.g Vodafone price is now 103 105, you only want to sell at 110. Your sell trade will only be opened when the price hit that target.
Stop Loss Order- This is the price you want to cut your losses and exit the trade if it's going in the wrong direction. You can place this at the time of placing your initial spread bet ( highly recommended).
This is an order to enter the trade either at market price or stop /limit price, then place a stop loss price at the same time to cut your losses if the trade goes against you after the trade is opened.
When you are in profit, you can turn it into Sell or Buy stop order to lock in profit, e.g you bought Vodafone @ 108 and now it's 130,you want to lock in profit and take the profit and run if it dips pass 125. You place a sell stop order @ 125.
Closing Your Spread Bet/ Financial Spread Trading Bet
You close the trade by placing the same stake in the opposite direction of your initial open order.
You can close the trade anytime you want without any penalty. So if you are in profit, you can just close it before expiration time /day.
What Instrucements And Time Frame Can You Spread Bet On?
You can spread bet on individual stocks, global indices, commodities, currencies, bonds, interest rates either on a daily basis, known as Cash,or Future, just like Options, normally expire on the 3rd Friday of every quarter, but some companies offer any months up to 6 months away. So this is ideal if you follow matrix or delta trading.
Please note, most of Futures like indexes and currencies operate 24 hours even though the stock market is closed after 16:30 pm. These "Futures " movements in price can follow other countries' volatility like London follows US after market closes at 4:30pm. US /European futures then follow the Asian market after US market closes. The European Cash market then follows the Asian market when it opens in the morning. So if you can't sleep at night, you can spread bet 24 hours a day!
Auto Roll Rover
Some spread betting companies now offer daily expiration spread trading with auto roll over on Cash ( end of day trade) and also every month. You pay interest ( LIBOR rate) either as a spread or cash ( Finspread use this method) on each roll over long position. You receive interest in Short position.
You need to close the trade before market close if you do not want to pay or receive interest.
Ready to give spread trading /spread betting a try?
Some spread betting trading websites offer virtual trading before putting real monies into the account.
Click here for
spread betting/ spread trading companies
Oh, almost forgot. If you are American, due to US Law, spread betting is not for you. If you are unemployed or have money that you can not afford to lose, spread trading/spread betting is not for you either.
Spread betting is for UK residence only. Some spread betting companies let you trade if you live outside UK, but winning would not be tax free.
You can try something similar to this and less risky like
Binary Options Trading
which can be traded if you reside outside UK.
Please read disclaimer before going further.
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