How to trade successfully with spread betting

How to Trade Successfully With Spread Betting

Spread betting is one of the most popular types of trading which, like CFDs (contracts for difference), offers investors a way to trade without actually buying or owning the underlying asset. It allows the flexibility to trade a variety of markets including forex currency pairs, shares, commodities and indices.

Many investors are exploring how to make money from spread betting although, with every other method, there are no guarantees that a trade will create a return.

Delve deeper with our guide to spread betting, where we'll explore the fundamentals of this form of trading and the factors to consider when investing in this way.

What is spread betting?

Spread betting is essentially speculating on the outcome of an asset value, which allows a trader to capitalise on the movement of a market, in which the value either rises or falls. This differs from many other forms of trading which rely on there being a fixed 'win' or 'lose' eventuality.

Like CFDs, spread betting is a type of derivative, allowing investors to place trades without owning the asset. The 'spread' refers to the difference between the price in which you can buy the stock and the price at which it can be sold, also known as the bid and ask prices.

To place a bet using this type of trading, you'll need to first place a leverage. This means depositing a portion of the value of the position from your account to be able to trade a higher amount, depending on the ratio. As the ratio is set by the individual broker, this value could vary significantly, depending on multiple factors, and individual or inexperienced traders are likely to be allocated a lower ratio.

You'll then decide how much to bet and on whether the price will increase or decrease. Traders make money spread betting when the stock moves in the direction that they wagered - the further that it moves, the more profit that it returns. However, it's also possible to lose money if the stock follows a trend in the opposite direction to your bet.

As with most markets, the value of the stock in play is determined by supply and demand, as well as a range of other influences.

Is it possible to trade successfully with spread betting?

While it is certainly possible that you can make money spread betting, the profitability depends on a variety of factors and, as with all aspects of trading, it's important to be aware of potential risks.

As spread betting is based on leverage, profit and loss are equally greater. A high leverage might be seen as key as it can yield an increased return if a bet goes your way. However, the same is true for a loss and, if a bet doesn't go in your favour, the losses can be just as great. Maintaining a tight rein on the leverage and refraining from casting the net too wide when it comes to the position on a trade is vital, particularly for those who are inexperienced.

Placing a stop loss order can also help to mitigate the risks. Setting up an automatic instruction to exit if the price of an asset goes past a maximum loss limit point will ensure that your risk is kept to a minimum.

How many people benefit from spread betting?

It's commonly known that the majority of those who day-trade lose money. A study by the U.S. Securities and Exchange Commission of forex traders suggested that 70% of retail forex customers lose money every quarter and, in relation to CFD trading, around 71% of retail investor accounts make a loss.

Although this data doesn't specifically cover spread betting, it's often reported that anywhere between 80% and 90% of those trading using this method are likely to lose. As spread betting is a similar method of trading to CFDs, it's certainly possible that these figures offer a somewhat sensible reflection.

Recent updated regulations from the European Markets and Securities Authority (ESMA) and the Financial Conduct Authority (FCA) mean that brokers must now be transparent with their customers in terms of the likelihood of making a loss. While this allows traders to make clearer, informed decisions, the statistics may lack data on certain accounts.

As professional accounts are often excluded from these insights, it can make it difficult to get a true gauge of how many traders, whether experienced or inexperienced, lose money. It's not easy to find statistics on how many traders make money spread betting, either.

But, if you're wondering if anyone makes money spread betting, it's likely that those who do are cautious with their wagers, draw on their experience and consistently put in place measures to limit any loss.

How do spread betting companies make money?

Trading companies and brokers make money from spread betting customers in a few ways. They benefit firstly from the 'spread', by increasing the margin slightly on a typical market price, meaning that they'll profit in either a win or loss situation.

Another way in which brokers typically make money is through acquisition of fees. If a customer wants to hold a position into the next day, there is often a fee to be paid.

What is an example of a successful spread betting trade?

As a simple, practical example of how to make money from spread betting, we'll use Tesla shares (TSLA).

You decide that you want a bet size of £10 per point of market movement. Let's say that the price of the shares was 190 in the morning and that you expected their value to rise.

The spread (bid-offer) is offered at 189-191, which equals a two-point spread, so you effectively buy (or take a long position) at one point above the current market value (191).

By the end of the day, the price of Tesla shares has risen to 198, eight points above where it started and an increase of seven points from your original buy price. Therefore, you make a profit of £70.

If, however, the price of the shares dropped to, say, 184, you'd make a loss of £70.

Spread betting on currency pairs in forex trading works in a similar way. Taking the EUR/USD, if you think that the price of the Euro (base currency) will increase, you'd choose to buy the currency pair, as opposed to sell. You'd then decide on your bet size per point and, depending on the movement direction of the Euro, gain or lose accordingly, as in the Tesla example.

It's important to remember here that the bigger the value of potential profit, the larger the potential loss.

Do you have to pay tax on spread betting?

With this type of trading, there's no tax to pay in the UK or Ireland and it's also free from commission, meaning that it can be an attractive option to try to make money spread betting.

Spread betting is also exempt from stamp duty, as you never actually own the underlying asset. You won't normally need to pay income tax, either, unless you choose to use spread betting as your main source of income.

What do you need to consider when spread betting?

There are no guarantees of making money spread betting and, even with a wealth of experience, traders can still suffer losses. There are many factors to consider when starting out with spread betting, including ensuring that you have sufficient funds, managing risk and refraining from wagering more than you can afford to lose.

How to trade successfully with spread betting

Whilst there's no hard and fast rule of how to place spread bets to make money, there are practical steps which you can take that can help to maximise your chances of success.

  • Research and get educated - There are plenty of online resources to help you to learn to trade. Research your preferred markets and understand the fundamentals of spread betting before you dive in.
  • Choose your market - If you've got previous trading experience, it's useful to start spread betting with a market in which you're well versed before branching out. Because spread betting allows you to wager on both directional movements, you don't necessarily need to choose an asset for its growth potential.
  • Create a strategy - The most successful traders usually form a plan based on technical analysis, chart patterns, news or company announcements.
  • Identify entry and exit (stop loss) points - Considering the risk-reward ratio can be an effective way to increase profit levels and this should form part of your strategy. Implementing a stop loss order can limit loss and offers a certain level of protection.
  • Choose a reliable trading platform - A quality platform, such as FXCM's Trading Station, will provide access to data, analysis and pre-loaded indicators, as well as features and educational functions to help investors to get the most out of trades.

Explore your spread betting options with FXCM

Start your journey today and discover if you can make money spread betting. Try your hand first with a free demo account, where you can trade live prices with £50,000 of virtual money, risk-free.

Alternatively, open an account now and start trading on both rising and falling markets across hundreds of financial instruments, with no commission or tax. Enhance your trading skills by taking advantage of our training guides and tools when you join the FXCM platform.

FXCM Research Team

FXCM Research Team consists of a number of FXCM's Market and Product Specialists.

Articles published by FXCM Research Team generally have numerous contributors and aim to provide general Educational and Informative content on Market News and Products.

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