Introduction
Financial spread betting can be defined as a type of wagering on the outcome or final result of a certain event. Here, the pay-off is not dependent on the whether it is a win or lose situation, but rather on the accuracy of the wager. Spread betting is quite popular in countries like the United Kingdom, etc. In fact in the UK, spread betting is not monitored by the Gambling Commission but by the Financial Services Authority.
Spread betting explained
In a nutshell, financial spread betting can be defined as sans commission, sans tax alternative to trading shares and other investment products in the financial markets. Thus, if you engage in this kind of betting, you won’t have to pay Stamp duty, account fees, commission of the stock broker or Capital Gains. A lot of people often confuse spread betting with shares trading. The two are actually poles apart, while the latter requires you to own the share, the former doesn’t. In fact,you simply bet on the performance of the share price instead of owning the share. However, you don’t just have the option of betting on shares, you can choose a variety of other financial products such as interest rates, bonds, commodities, stocks, currencies, indices, etc.
Risks involved in spread betting
Financial spread betting does not come without risks, in fact there is a better chance that one would end up losing one’s outlay. This is because the odds are in favor of the companies dealing in spread betting. Generally eight percent of the bets lose, and this is quite a high figure. However, people still decide to go with spread betting because they can make extremely high returns on their bets or money if they are lucky enough to fall under the twenty percent that win.
While a lot of spread betting companies may not be very upfront about the fact that the odds are against the investors in spread betting, they do admit that a majority of the trades result in a loss. And this is justified too because financial spread betting is not investing but more like gambling. Thus, you are legally obligated to pay up.
Limiting your risk
The good thing about the fact that financial spread betting is highly risky is that one can limit one’s risk. In order to do this one must first understand the spreads that one is betting on. Ensure that you are knowledgeable about how to calculate the value of the spread so that you can decrease your risk. The profit that you earn is dependent on the difference between the end result and the level at which one’s bet was originally made. This is then multiplied by the stake one nominates. In order to limit the potential losses coming your way, you can use a limited risk account or a stop loss-win account. The latter keeps a cap on one’s potential losses, however it is advisable to understand the stop loss rules first before using such an account because it can also limit one’s winnings limit. Therefore it is advisable to thread with caution here.
