Once the realm purely of City financiers and brokers, spread betting had become increasingly popular with people outside the City in recent years, with some 150,000 spread betting accounts now open. If you're interested in doing the same, then it's important that you understand the risks involved, get to know the technical details and think of some kind of strategy, or else you could end up out of pocket. Don't start before you read these five handy tips. If you think you'd like to open an account, Tradefair are currently offering £100 in free credit. Visit their website to learn more and sign up for a spread betting account.
How it Works
In a spread bet the provider will quote a 'buy' (offer) and a 'sell' (bid) price for a security, whether it be a stock, commodity, index or foreign exchange. This difference in price is known as the spread. If the FTSE 100 stood at 5600 on Tuesday, then there might be a buy price of 5602 and a sell price of 5598. If you chose to buy overnight at £10 per point and by the market's close on Wednesday the FTSE 100 stood at 5622, then you would have profited £200, as the market would have advanced 20 points on your offer. However, if you bought and the market fell by 20 points, then you would stand to lose £220.
Stress Warning
The example above illustrates some of the risk factors involved in spread betting. Of course you can stand to win big if the market goes with you, but you could lose even more if the market went the wrong way. Although your predictions may be informed, spread betting is speculative, and sometimes a roller coaster ride. Don't get involved if you want to sleep at night or you're cautious about the risk to your money.
Using Simulator Accounts
Before you get started, using a simulator account will help you understand the spreadsheets that you will be using to place bets, as they can be confusing for a new comer. Use this for a couple of months to get familiar with it and ensure you don't make simple mistakes. If you do well on the simulator, don't go thinking this success will necessarily be replicated in real life. You should use it to learn the ropes of spread betting, rather than to see how good you are at it.
Using Stop Losses
Using stop losses might seem like a conservative move, but it's an important one to make. It can be frustrating when it prevents higher moves in a positive direction, but it can also save your account from dropping as much as 10%-20% in a single trade. If you leave a bet open and the markets keep moving against you then its quite possible that just one trade could devastate your account
Specializing
Experienced professional traders will specialize in just one or two markets, and you should to if you're serious about making a return. The UK FTSE 100 is a good starting point, while UK blue chip companies can also be good as they are more liquid. The US Dow and emerging markets are normally too volatile for beginners.
