What is Spread Betting?
Spread betting is betting whether the price of an asset will rise or fall. It’s that simple, and that wonderfully complicated. It’s a gamble that can be based on almost anything in the market, from shares and commodities, all the way to house prices. The key difference between spread betting and traditional investing is that all you’re paying attention to is if the price will rise or fall, you don’t actually own the asset in question.
What’s the difference between Spread Betting (SB) and Contracts for Difference (CFD)?
SB is only allowed in UK and Ireland while CFDs are allowed globally. There are some differences in terms of taxation and restrictions on individuals or companies, but otherwise they are very similar.
How it Works
A spread betting company quotes two prices: the bid price and the offer price (the difference between these two prices is where the term ‘spread’ comes from). As far as investors are concerned, the price of the actual stock doesn’t matter, only if it will fall higher or lower than the spread.
Let’s say a spread betting company quotes a bid of $100 and an offer of $105 for Stock A. Based on your knowledge and investing experience, you think that Stock A will exceed the offer price of $105. You can then bet a certain amount of money on every dollar that Stock A surpasses the offer price. If you were to bet $1, and after a week the Stock A cost $120, you would receive $15, but if you were wrong, and Stock A fell below $100 to $90, you would lose $15.
Stock market jargon that can help with spread betting
As with any financial niche, spread betting comes with its own set of jargon. A lot of the terms relate to trading and investing as a whole, but some are specific to spread betting or mean something a bit different in a spread betting context. We’ve defined some of those below to help you get in the game.
Arbitrage – Refers to trading to exploit an anomaly in prices. Because of all the information out there and instant communication, this is rare in spread betting. Usually arbitrage happens when two companies take different stances on the market. When two companies set their spreads far enough apart an arbitrageur bets with two companies for riskless profit.
Bull – Someone who thinks the price of an asset will rise
Bear – Someone who thinks the price of an asset will fall
Contact Note – A communication that confirms the key details of a trade
Day Trading – Placing many bets in a short period of time in order to make fast profits.
Gearing – The ability to make large profits or losses with a small amount of money
Margin – The money a broker will need as a security deposit
Stop loss – This is an order that attempts to get you out of a once your losses have hit an agreed upon limit. (You will really want to use these. They might keep you out of the fire one day)
Guaranteed stop – An order that guarantees you get out of a trade after agreed upon limit of losses – usually more expensive than a stop loss.
Common mistakes when comparing spread betting accounts
1. Over-leveraging your positions – When you’re getting into spread betting, it’s important to have goals. More important than having goals is having a plan to realistically achieve them once you’ve set them. Some get into spread betting leveraging more their net worth. Don’t do this. It will end badly.
2. Speculation without research – It doesn’t matter who you are, all forms of trading come with a degree of speculation. But this shouldn’t mean you throw your hands in the air, close your eyes and make random trades will-nilly. Speculation will be part of trading, but with research you can make informed speculations and further manage your risks.
3. Non-diversification – It’s important to keep your trading in the realm of things you understand. Just as important though is diversifying your bets. This is important for all the same reasons diversifying your portfolio is.
4. Having the wrong mindset – Trading is an exercise in psychology as much as it is anything else. If you’re getting into with a temper, or you’re someone who is totally risk averse, you’ll be in hot water before you even open an account. If you’re not the kind of person who can stay calm after a few losses, or keep a cool head after a big win, you should reconsider getting into it at all. Certain types of over emotional people will find themselves in a situation where they let their losses run, and cut their profits of early, which is the exact opposite of what you want to do. If you suspect you’re one of these people and want to find out, spread betting will inevitably teach you a lot about yourself, but there are more effective – and much cheaper – ways to learn about your psychological profile.
5. Always looking to the big brokers – Bigger isn’t always better. When you’re looking to open any kind of financial account, it should be obvious that you need a reputable, reliable broker. Using just one account or the wrong account for you could end up costing you in a massive way as you keep trading. Often the image we have of brokers comes from name recognition and marketing. This isn’t necessarily a bad thing, but keep in mind that all that money spent on marketing comes from people who use the service, and smaller brokers that don’t dump as much money into marketing might be a better fit for you as you try to maximize your profits.
6. Forgetting you’re buying something – If you’re planning on buying a car, some new stocks, or even thinking about switching brands of mayonnaise, you’re probably going to spend a lot of time on the internet doing research. Opening a spread betting account is a deceptive phrase, because you’re really buying a service. Read as much as you can, talk to your friends and colleagues who might have some good advice. Over the past few years, services have popped up online with the expressed goal of helping you find the best spread betting account. No matter how badly you want to start, take your time, remember opening an account is making purchase.
7. Not considering cost for value – Just because opening an account with one broker over another is cheaper and will save you some money in the short term, it may not be best for you down the road. Spread betting can be boiled down to simple terms, but there are a lot of intricacies in the process that can save or lose you money as you go on. This is where your research will come in. Just looking at what appears to be the cheapest account might not end up being the best for your profits.
A few things to consider
Spread betting comes with the ability to make serious gains, but is matched by the risk of massive losses. It’s something you should only consider once you’ve gained some experience in the market, and the capital. It can be exciting; a move of few points can earn – or lose – you hundreds or thousands of dollars. When you’re getting started, remember to start small so you can really figure out what you’re doing to avoid unnecessary losses.
Another thing to consider: Making money isn’t the same as “winning”. The goal in spread betting, like all forms of investing, is creating profits for yourself. If your win loss ratio isn’t great, but you win when it counts, that’s much more important and overall better for you.
Always go into spread betting with a strategy. Some bettors follow the news or corporate actions to inform their bets, others use technical analysis like following trends or banking on a trend reversal. There are many you could employ, but after a while you’ll develop a hybrid all your own. A good place to start is by making small bets when the risks are high, and getting more aggressive with less risky bets.
Whatever your strategy ends up being, consider the risks and rewards. Spread betting and gaining any kind of mastery of investing is hard work. It’s important to understand this. People offer services and courses that are costly, and often about as useful as a leash for a goldfish. Be smart, take your time, use the advice above to find and open your account. We can’t guarantee success, but we have given you information that will help you on your way.