Why Spread Bet
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Why Spread Bet? There are many positives but there is also one key negative. Because spread betting is a leveraged product you can end up losing more than you initially invest. Of course because it is a leveraged product you can also win more than you initially invest.
We will discuss the many positives in a moment but with spread betting you should always be aware of the aforementioned downside. You should also be aware of some of the simple ways of reducing the risk.
Two important ways of reducing your downside are Stop Loss Orders and Smaller Stakes.
'Stop Loss Orders' and 'Guaranteed Stop Loss Orders' allow you to set the limits on how much you want to risk on each individual trade. Spread betting companies like Financial Spreads automatically apply a Stop Loss to all trades without limiting how much you can win.
It is important to note that Stop Losses are not guaranteed. Your order may be filled at a different level. If you want a Guaranteed Stop Loss that will cost a little more (a wider spread). Both types of Order help you limit your risks and give you peace of mind in volatile markets.
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Small stakes. Another way of reducing your risk. Of course smaller stakes mean you will win less but they also limit how much you can lose. You can now open a spread betting account with £50 to £100 and trade with small stakes. With spread betting account from paddy power trader, World Spreads or FinancialSpreads.com you can trade the FTSE 100 from £1 or 1 Euro per point.
Once you understand how to limit your downside it is worth looking the many positives that make spread betting so popular.
Firstly, Buying and Selling. This form of trading offers two-way trading ie you can bet on a market to rise as you would with normal share trading. However it also means you can bet on a market to go down.
Secondly, the Wide Range of Markets. Most spread betting companies offer a wide range of markets. So you can trade on all your normal shares but you can also trade:
- Indices like the FTSE 100, Dow Jones, Dax etc
- Commodities like Gold and Crude Oil
- Forex markets like Euro / Dollar, Dollar / Yen, Pound / Swiss Franc
- Shares from other countries like the USA, Japan, Ireland, Germany etc
And then there is Value. No fees. There are no broker fees and no commissions on a standard spread betting account. And if you live in the UK your profits are Tax Free, that means no income tax, no capital gains tax and no stamp duty.
Let us not forget the more relaxed trading hours. A number of markets are available to trade outside of Normal Market Hours (note that when you spread bet outside market hours the spreads are often wider).
Overall, provided you control your risks, having a spread betting account is a quick, versatile and convenient way of trading. Of course you must get those risks under control.
"Why Spread Bet" written by RThomas, last updated 24-Dec-2008
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