Spread Betting and Reducing Your Trading Risk
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So you want to invest in gold but do not want trade through an Exchange Traded Fund? Likewise you probably do not want to take physical possession of the metal.
Well, now you can bid adieu to the complications associated with the actual possession of bullion with the help of financial spread bets. Spread bets today include a wide range of markets on which you can trade.
That is not to say you should restrict your trading to spread betting, however, but it is worth considering as part of your investment portfolio. For example, you might trade shares and want to hedge some of the risk. Spread betting provides a way of letting you do this. One method is to spread bet on shares to go down, this is also known as ‘shorting’.
Spread bets have emerged as an enabler for people who want to explore the capital markets via non traditional routes. It allows you to be actively involved in the financial markets without actually taking any physical possession of commodities, there are no share certificates and no large foreign currency holdings.
Of course, you are required to make more than an educated guess about the future trends in the markets you want to trade.
At the heart of spread betting lies a “bid-sell” offer. The spread is the difference between the bid and the sell offer and basically involves 'going long' and 'going short'.
While a long position entails an optimistic approach towards the markets the short position is based on the premise that the markets may go down.
Before entering into any spread bets it is important to understand the dynamics of the market you are entering into. There are thousands of markets available with companies like Spreadex and ShortsandLongs.
You can trade gold and oil as well as spread bet on Indices such as the FTSE 100, Dax 30 and Dow Jones. You can also spread bet on shares from the UK, USA, Ireland, India etc. You even trade forex rates including Euro/Yen, Pound/Euro, US Dollar/ Australian Dollar etc.
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As with all investments though, thorough research into the field you are entering into is needed and will hopefully help you reduce any losses.
Having said that, there are also various mechanisms available to you which can help you restrict your potential losses. One of the most obvious and often ignored methods is simply trading in smaller sums.
Another method of reducing your risk is to employ a ‘Guaranteed Stop loss’. This is a process whereby, if your spread bet is going against you, an automatic trade is triggered when the market breaches a predetermined level. This will close your trade and ensure you do not lose any more money even if the market continues to move against you.
A third method is open a ‘Demo Account’ with a company like FinancialSpreads.com, these let you trade the markets for free with virtual funds and without risk.
It’s understandable that investors want to spread bet given that spread betting is tax free in the UK and Ireland. There are thousands of markets and you can speculate on these markets to go up or down.
Do note though that you can lose more than your initial investment or stake. Spread bets may not be suitable for all investors. Only trade with money that you can afford to lose. Make sure you fully understand the risk involved. If necessary, seek independent financial advice.
"Spread Betting and Reducing Your Trading Risk" last update by R Thomas, 04-Sep-2009
Warning: Financial spread betting carries a high level of risk. You can lose more than your initial investment or stake. Financial spread betting may not be suitable for all investors. Only trade with money that you can afford to lose. Make sure you fully understand the risk involved. If necessary, seek independent financial advice.
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