Even if you’re a frequent or experienced investor, you may have come across the term ‘spread betting’.
In sports betting, for example, the ‘spread’ describes a range in which it’s believed the result of a given market will fall, while it comprises two numbers that will determine how a punter will bet.
But what does spread betting in relation to investment? We’ll explore this in the article below, while appraising its benefits and asking when you should use this investment vehicle?
What is Spread Betting?
In an investment context, spread betting works in broadly the same way as the sports wagering market.
More specifically, you’ll be speculating on a particular market outcome, such as the increase or depreciation in value of a specific currency pair.
In this instance, you’ll ‘go long’ (or buy) if you expect the value of an underlying asset to rise, while assuming a short position (sell) if you believe it will decline.
You won’t have to assume ownership of the underlying financial instrument, while your eventual profit or loss will be determined by the movement of the market and the accuracy of your speculation.
Why is Spread Betting a Viable Strategy?
With spread betting, traders are afforded a tremendous sense of flexibility. Certainly, they have the potential to go long or short and adapt according to their perception of the market, creating a scenario where they can profit even in a depreciating climate.
You can also trade on margin and secure inflated leverage as a spread bettor, enabling you to control disproportionately large positions with a relatively small deposit.
Of course, this means that both gains and losses can be magnified over time, which is why effective and intuitive risk management is crucial to the success of this strategy.
Your spread betting profits are also completely tax free in the UK, while the investment vehicle affords you access to a range of markets (like forex and commodities) 24-hours a day.
The Importance of Planning
Like any investment strategy, spread betting works best and has an optimal chance of success when it’s underpinned by a well-researched and viable plan.
After all, while the vehicle creates greater flexibility by enabling you to go both long and short, you’ll need to combine real-time knowledge of the market with a keen sense of determinism to make informed predictions and gauge precisely where prices are heading.
Capital management is also key, especially from the perspective of capping leverage. Remember, some reputable brokers will offer leverage of up to 200:1 to traders, creating potentially huge returns while optimising their exposure to risk.
Ultimately, you’ll have to cap leverage according to your financial resources and appetite for risk, in order to operate as efficiently as possible over time.
This article is for information and educational purposes only and does not form a recommendation to invest or otherwise. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.