What is Spread Betting and Should you be doing it?
We all want to make some money, and spread betting is an excellent way to do it. But what is spread betting? Originally invented by a mathematics teacher named Charles K. McNeil in the 1940’s, spread betting then took off in the UK when IG Index was founded in 1974, offering spread betting on gold.
This is a derivative strategy. Participants don’t actually own the asset they’re betting on, such as a commodity or stock, and are actually speculating on whether the price of the asset will fall or rise using the prices that a broker gives them.
Some of spread betting’s key characteristics include the ability to go both short and long, the use of leverage, the tax benefits, and the many markets available.
Spread betting is similar to stock market training in the way that two prices are quoted- the price that you can buy, and a price where you can sell. The difference between these prices is called a spread, and spread betters don’t need to pay a commission, unlike regular betting.
Since you’re taking a position about the worth of an asset without actually owning it, the money you bet only needs to be a tiny part of what the actual price of it would be. This is an interesting way to bet and is known as leverage. You can use spread betting to increase the size of your trade, increase your exposure, and make a large profit from a small investment.
It’s important to understand that while you can make a relatively large profit compared to your small investment, if the market moves in an opposite direction to what you’re hoping for, you have the potential to incur sizeable losses. So while the potential reward is greater when compared to conventional trading, the potential risks are also greater.Say you’re betting on gold, and you have a good feeling that gold is due to rise in value. You’ll “buy” with spread betting hoping that you can sell it at a higher price and make a profit. However, if you think it’s about to fall, you can see it and buy it back later for less money, and make money on the trade.
The size of the spread is significant when it comes to betting. If the difference between the sell and buy prices are small, this means that the spread is tight and your trading costs are reduced, and your chance of being profitable if there’s only a small move in the market is high.
If you’re new to spread betting, using a demo account is an excellent way to get used to the way it works, while betting risk-free. You’ll be able to get the hang of spread betting without putting money on the line while you learn.