Spread betting is perhaps the simplest form of derivative trading out there and is definitely the most tax-efficient. Spread bets permit you to bet that the price of an underlying asset (a share, commodity or index) will rise or fall. What this means is that you could hedge your existing holdings, maybe betting on a fall in the FTSE 100 to offset the risk of a fall in your UK portfolio.
You can also use spread betting to speculate on your view of an underlying asset (a share price or index level, for example), either attempting to profit from a falling price or hoping to make enhanced gains from a rising price. Betting on falling prices is known as 'going short', while betting on rising prices is called 'going long'.
The wonderful advantage of spread betting is that gains are totally free from tax. This means you don't have to pay capital gains tax at 40 percent (for higher-rate taxpayers) on gains over the annual exempt allowance, that is currently 9,200. However, you can't offset any losses from spread betting on gains made elsewhere.
Spread betting is also very flexible and allows you to select risk levels to fit your own circumstances. This is because the higher the degree of gearing (magnification) you use in the hope of boosting returns, the more your profits or losses will be enhanced.
For instance, you can set your gearing level at 10 times (10-1), where your profit or loss would change by 10p for every point move in the FTSE 100 index. If you were more confident (or could stand to make a larger loss), you can gear up by one thousand times, where every point move by the FTSE 100 would produce a 10 change in the value of your bet.
Even though spread bets could be kept open for a number of months, you need to leave a deposit (referred to as margin) with your broker. A typical minimum margin level will be about 2,000. Nevertheless, if you are making a loss on your position, you must top up the margin every day - although you do not have to keep the bet open for as long as you intended at the outset, obviously.
If you bet on a rising price, you are able to make unlimited enhanced profits. Not to mention, if the market moved against you, your losses would be enhanced but capped, as the underlying price could fall no further than 0p.
On the other hand, if you bet on a falling price, your probable profits could be enhanced but limited. And if you bet on a falling price and it rose, your losses might be unlimited - therefore, the need to top up your margin (on any day you lose money) serves as a break and could force you to close a disastrous position, instead of accumulating enormous losses, which would just be settled at the close of the bet.
You can likewise restrict your potential downside by means of setting a stop-loss with your broker. This might close your position, if the underlying price moved against you and past a predetermined level (falling 10 % below its opening price, for instance).
Stop-losses shouldn't be set way too tight, however, because the underlying price might move against you before changing direction, which means you do not desire to be closed out too early. You can also use a trailing stop-loss, which keeps the same percentage-point distance yet follows a rising underlying price up in a bull market, allowing you to lock-in some gains.
Spread-betting providers set their own spreads, which are not necessarily the same as the bid price and offer price for an underlying share. Thus spreads can be set a lot wider for spread betters (although, in theory, competition between brokers ought to keep spreads reasonably tight).
In reality, however, underlying spreads on some shares can be as wide as 5 percent, although they are normally much tighter for big, frequently-traded shares. This is because the wider the spread, the larger the movement needed by the underlying price for the bet to pay off.
You go long with a spread bet by 'buying' the underlying asset at its offer price and close it by 'selling' at the bid price. To go short, 'sell' the underlying asset at the bid price and close by 'buying' at the offer price.
The only difference is in foreign-exchange trading, sometimes known as forex, which is a form of spread betting. Currencies are at all times shown in pairs and you buy the one you think will perform better. For instance, if you think the dollar will fall relative to sterling, you need to buy sterling (versus the dollar).
To conclude, spread betting is good fun, and almost anybody can take pleasure in the odd bet now and again. But when you want to make money from spread betting, then it should be taken seriously and a disciplined and tactical approach is required.
You can also use spread betting to speculate on your view of an underlying asset (a share price or index level, for example), either attempting to profit from a falling price or hoping to make enhanced gains from a rising price. Betting on falling prices is known as 'going short', while betting on rising prices is called 'going long'.
The wonderful advantage of spread betting is that gains are totally free from tax. This means you don't have to pay capital gains tax at 40 percent (for higher-rate taxpayers) on gains over the annual exempt allowance, that is currently 9,200. However, you can't offset any losses from spread betting on gains made elsewhere.
Spread betting is also very flexible and allows you to select risk levels to fit your own circumstances. This is because the higher the degree of gearing (magnification) you use in the hope of boosting returns, the more your profits or losses will be enhanced.
For instance, you can set your gearing level at 10 times (10-1), where your profit or loss would change by 10p for every point move in the FTSE 100 index. If you were more confident (or could stand to make a larger loss), you can gear up by one thousand times, where every point move by the FTSE 100 would produce a 10 change in the value of your bet.
Even though spread bets could be kept open for a number of months, you need to leave a deposit (referred to as margin) with your broker. A typical minimum margin level will be about 2,000. Nevertheless, if you are making a loss on your position, you must top up the margin every day - although you do not have to keep the bet open for as long as you intended at the outset, obviously.
If you bet on a rising price, you are able to make unlimited enhanced profits. Not to mention, if the market moved against you, your losses would be enhanced but capped, as the underlying price could fall no further than 0p.
On the other hand, if you bet on a falling price, your probable profits could be enhanced but limited. And if you bet on a falling price and it rose, your losses might be unlimited - therefore, the need to top up your margin (on any day you lose money) serves as a break and could force you to close a disastrous position, instead of accumulating enormous losses, which would just be settled at the close of the bet.
You can likewise restrict your potential downside by means of setting a stop-loss with your broker. This might close your position, if the underlying price moved against you and past a predetermined level (falling 10 % below its opening price, for instance).
Stop-losses shouldn't be set way too tight, however, because the underlying price might move against you before changing direction, which means you do not desire to be closed out too early. You can also use a trailing stop-loss, which keeps the same percentage-point distance yet follows a rising underlying price up in a bull market, allowing you to lock-in some gains.
Spread-betting providers set their own spreads, which are not necessarily the same as the bid price and offer price for an underlying share. Thus spreads can be set a lot wider for spread betters (although, in theory, competition between brokers ought to keep spreads reasonably tight).
In reality, however, underlying spreads on some shares can be as wide as 5 percent, although they are normally much tighter for big, frequently-traded shares. This is because the wider the spread, the larger the movement needed by the underlying price for the bet to pay off.
You go long with a spread bet by 'buying' the underlying asset at its offer price and close it by 'selling' at the bid price. To go short, 'sell' the underlying asset at the bid price and close by 'buying' at the offer price.
The only difference is in foreign-exchange trading, sometimes known as forex, which is a form of spread betting. Currencies are at all times shown in pairs and you buy the one you think will perform better. For instance, if you think the dollar will fall relative to sterling, you need to buy sterling (versus the dollar).
To conclude, spread betting is good fun, and almost anybody can take pleasure in the odd bet now and again. But when you want to make money from spread betting, then it should be taken seriously and a disciplined and tactical approach is required.
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