Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 72.60% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Spread betting is a form of financial trading that is based upon derivatives. With this type of trading, the investor does not actually own the asset which he is trading. Instead, he is speculating on the price movements of the said asset. Will the asset price rise or fall?
In many ways, spread betting is similar to stock trading. Like stocks, spread betting involves two prices, the BID price (Buying price) and the ASK price. (Selling price). The difference between these two prices is known as the spread which is what the broker earns and also which is what makes spread betting commission free.
With spread betting, if an investor feels that the market is bullish (rising), he will take a long market position and align himself with the BID price. Conversely if he feels that the market is bearish (falling), he will take a long position by aligning himself with the ASK price. That way, if prices in the market rise, he will be able to pocket the difference between the BID price and the new price. For the latter case, he will pocket the difference between the ASK price and the new price when prices in the market fall.
With spread betting, there is an additional element to the trade which the investor has to consider, which is the “stake” size. For example, if an investor stakes an amount of $10 for each point in price difference, this means his total profit is the number of points multiplied by the stake amount. So if the price of an asset moves by 10 points in his favour, the investor would have reaped a return of 10 pts x $10 = $100.
Spread betting is a relatively new financial trading innovation when compared to other forms of financial trading such as stock trading and futures trading. The concept of spread betting first began in the mid-1970s as an alternative method of trading gold, as merchant bankers would gather together in order to “fix” the prices against which gold would be bought and sold.
Once the prices had been agreed, they would then be announced to the market as a foundation for which gold would be traded, expressed as a “Buy” and “Sell” price on what level the next price “fix” would be determined at. As such, those who felt that the next price fix would be higher place a “Buy” bet and vice versa. What started as a market innovation in the 1970s began to appear more commonplace as more and more spread betting providers came into the picture by the late 1980s.
While the spread betting market was expanding in the late 1980s and early 1990s, its growth was curtailed by the lack of computing and internet technology. As such the spread betting market was restricted to a small circle of professional financial traders. For retail traders, the spread betting market was still a domain which was largely uncharted.
Apart from easier access, traders nowadays are offered more trading tools such as up to date quotes, comprehensive analytical tools as well as larger coverage of the markets. In addition with the introduction of smartphones and mobile trading apps, investors are no longer required to stay glued to the screen of their desktop computers to manage their trading portfolio.
Spread betting today has certainly progressed a long way from when it was first introduced in the 1970s. It has become a viable investment instrument for the average retail trader due to its affordability and high returns. The fact that gains made on spread betting are tax-free makes it an even more attractive investment option for those residing in the UK.
