Financial Spread Betting & SpreadBetting Companies Explained

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An Introduction to Financial Spread betting

Today I want to share with you my experience with some Spread Betting companies. First of all, I want to explain what is actually financial spread betting as a financial product. It has many similarities with Spot Forex and Binary Options contracts but it is totally different. It has regulated as a financial product from the biggest regulators of the world (FSA etc.). One advantage of this product is that it’s tax free, at least in UK and Ireland. There are many financial spread betting firms and they offer Forex, Commodities, Stock Indices, a big amount of shares, Bonds, Interest Rates and House Prices. A client can spread bet in every one of the above products and like Spot Forex and Binary Options he can earn money by the rise or the fall of the market.

In every company there is a bid/offer price for each product. If you believe that the market will rise , you can buy the product in the offer price. If you believe that the market will fall you can sell the product in the bid price. So, simply. The companies made money from the hidden spread within the offer and the bid price. The spread is usually 1 point (pip) for the popular products like Forex, Commodities and Stock Indices. Now, the question is how much money you can earn by the rise or the fall of the market if you will predict right. Before this, you should know some basics things about the financial spread betting. Let’s go.

• The hidden spread

This is how spread betting firms make money. From the hidden spreads. For example, let’s say that we have the currency pair EURUSD and it’s 1.28276 and we have the offer and the bid price. If you want to buy the pair maybe the price will be 1.28277 and if you want to sell the pair maybe the price will be 1.28267. This difference of 10 pipettes (1 pip) is the hidden spread and it’s the company’s profit. Like the Spot Forex Brokers.

• How many $ per point

Now, this is the real deal. In these spread Betting Brokers you can fix your contract and choose how many dollars or euro you want to earn or loose by the change of one point (one pip).So, let’s say that we want to buy the above currency pair, EURUSD, because we believe that the Euro will rise and we choose 20$ per pip(point). We buy at 1.28277. After some minutes the currency pair is at 1.28377 that means that there is a 10 pips change up for our favor. So,
10 pips * 20 = 200$
And this is our profit.

Like Spot Forex or Binary Options in an Exchange you have the choice to put a stop Loss or a stop limit order. With a stop loss order you can protect your account from a big loss and with a stop limit order you can protect your profit from a big bad change of the market and take your profit and leave.

You have the choice to put some other orders before the price hit the strike price you want. For example, if the currency pair EURUSD is at 1.29200 right now, you have the choice to put a buy order right now, only when the currency pair will reach at 1.29240. You can do the same with sell orders. You can put Stop Loss/Limit with these orders, too.

It’s the amount of money you must have in your account to take a trade. Your account balance must be enough to cover the damage in a case of a loss.

  • Profitable ways which I use for spread bets

The best way to make money with spreads, it’s obviously trends. If you can identify a trend from its beginning and invest on it there isn’t a limit to the money you can earn. Of course, stop Loss is a “must” because in a market with high volatility if the price will move against you it’s very easy to wipe out an account. So, you should never take a trade without a stop Loss order.

Except trends, you could trade the news with some orders I said above. For example, if some news is coming, you can put an order to buy in a particular strike price and catch a bullish break out. Stop Loss is again a “must”. Let’s see some screen shots.

Here are some trades of mine. Look at AUDUSD at 19:43. I bought the currency pair for 10$ per pip.

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It was the begging of a new up trend. I closed my position some minutes later and I took my profit which was 86$.

Spread Betting Companies

Let’s firstly see what is Spread Betting in general, at glance is a spread which is a range of outcomes between bid and offer price. And the bet is guessing whether the outcome will be above or below the spread offered by the particular broker, so you may trade without actually taking any position in the current security. The general purpose of that is to create an active market for both sides, the ones who selling or buying, and to speculate on financial markets in the same way as trading derivatives with no single stake to limit any loss.

  • The Spread Betting Companies usually offer to bet across multiple asset classes and including forex, even with Cryptocurrencies, commodities, indices, and shares.
  • The spread betting should be strongly reviewed and controlled, as a leveraged investment brings both opportunities to significant gains or losses.

Spread Betting shows a significant growth within the UK for the last years and is regulated speculative trading activity by FCA. Yet, spread betting concentrated mainly in the UK due to its legal authorization and even a tax break on profits, while many world countries forbid spread betting for various reasons. Thus, the broker provider should be carefully selected after consideration of all applicable local laws and regulatory statutes. In case the company or broker offers you unauthorized Spread betting possibility, you should not be allured with an attractive opportunity. As in fact, only regulated and authorized trading adheres to safe trading practices and may be classified as potentially safe investment. Otherwise, you may easily fall under the fraud.

Spread Betting

What is Spread Betting?

Spread betting refers to speculating on the direction of a financial market without actually owning the underlying security. It involves placing a bet on the price movement of a security. A spread betting company quotes two prices, the bid and ask price (also called the spread), and investors bet whether the price of the underlying security will be lower than the bid or higher than the ask. The investor does not own the underlying security in spread betting, they simply speculate on its price movement.

Understanding Spread Betting

Spread betting allows investors to speculate on the price movement of a wide variety of financial instruments, such as stocks, forex, commodities and fixed income securities. In other words, an investor makes a bet based on whether they think the market will rise or fall from the time their bet is accepted. They also get to choose how much they want to risk on their bet. It is promoted as a tax free, commission free activity that allows investors to speculate in both bull and bear markets.

Spread betting is a leveraged product which means investors only need to deposit a small percentage of the position’s value. For example, if the value of a position is $50,000 and the margin requirement is 10%, a deposit of just $5,000 is required. This magnifies both gains and losses which means investors can lose more than their initial investment. (To learn more, see: Margin)

Key Takeaways

  • Spread betting refers to speculating on the direction of a financial market without actually owning the underlying security.
  • The investor does not own the underlying security in spread betting, they simply speculate on its price movement.
  • It is promoted as a tax free, commission free activity that allows investors to speculate in both bull and bear markets.

Spread Betting Example

Let’s assume that the price of ABC stock is $201.50 and a spread-betting company, with a fixed spread, is quoting the bid/ask at $200 / $203 for investors to transact on it. The investor is bearish and believes that ABC is going to fall below $200 so they hit the bid to sell at $200. They decide to bet $20 for every point the stock falls below their transacted price of $200. If ABC falls to where the bid/ask is $185/$188, the investor can close their trade with a profit of <($200 - $188) * $20 = $240>. If the price rises to $212/$215, and they choose to close their trade, then they will lose <($200 - $215) * $20 = -$300>.

The spread betting firm requires a 20% margin, which means the investor needs to deposit 20% of the value of the position at its inception, <($200 * $20) * 20% = $800, into their account to cover the bet. The position value is derived by multiplying the bet size by the stock’s bid price ($20 x $200 = $4,000).

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