Spread betting is a leveraged derivative product. These financial products, typically used for speculation, offer features similar to futures contracts and Contracts for Difference (CFD). Spread betting shares entails the speculation of price changes in the equities market. Establishing a well defined trading system with money management rules may be the best approach to spread betting shares.
Spread betting is not available in the US and some other countries. It was developed in the UK and is popular in Europe, Australia, and South Africa. The major advantages of spread betting include tax free profits, a high degree of leverage, and a wide range of markets. Fees and commissions are typically included in the spread.
The investor can trade price movements in stocks, commodities, currencies, stock indices, and bonds without assuming ownership of any assets. Spread betting shares will enable the investor to trade individual stocks or indexes with highly leveraged derivative contracts. The high degree of leverage can result in very high risk/reward ratios. The exposure to risk in highly leveraged contracts can result in huge losses, margin calls, and the total loss of investment funds.
Profits earned on spread betting shares are usually not taxable, but the trader should verify tax laws in each particular country. These shares are considered winning bets under tax law and are treated as gambling. The spread betting industry is typically regulated, so the trader should open an account with a regulated dealer.
As far as spread betting shares is concerned, the only difference between gambling and trading is the system used. Trading systems have specific signals that provide trade entry and exit points. These signals are generally discovered through a process of fundamental and technical analysis. A good money management plan is an essential element in the trading system. Overtrading is the most common road to large losses.
Spread betting contracts are time sensitive. Be aware of all fees and charges involved with holding positions over long periods. The bid and ask prices of the spread are similar to other markets, but broker fees and commissions are included. Equity spread prices will not be the same as the actual market prices because spread contracts are priced like futures. The prices quoted include cost of carry and are at the brokers discretion.
Risk management is the most important aspect of spread betting. The investor can lose more than the original investment. The investor should make use of the risk management tools provided by the broker such as stop loss orders and trailing stops. A full analysis should be done on the market being traded. The maximum risk should be considered on each trade with the emphasis placed on maximum loss.
