It is rare to get a City fund manager who consistently outperforms the market over the long run, so what chance has the dentist from Dumbarton or the teacher from Truro got? Secondly, the way these bets are structured puts the gambler at a disadvantage.
A share trading at p may need to be bought at p, from which your winnings and losses are calculated. If the share goes up by 1p, you would win nothing.
If it goes down by a penny, you would lose 2p a share — or two times your stake. Thirdly, buying shares in the traditional manner may provide an investor with an income via a dividend, which would need to be factored into any profit calculation.
There are no dividends with spread betting. Why do so many financial spread-betting companies sponsor football and rugby clubs? It is not just sporting teams. The reason for this effort stems from the ratio of losers to winners. Spread betting has three main features: the spread, bet size and bet duration. The spread is the difference between the buy and sell prices, which are wrapped around the underlying market price. For example, if the FTSE is trading at The bet size is the amount you want to bet per unit of movement of the underlying market.
You can choose your bet size, as long as it meets the minimum we accept for that market. Your profit or loss is calculated as the difference between the opening price and the closing price of the market, multiplied by the value of your bet. We measure the price movements of the underlying market in points.
Depending on the liquidity and volatility of your chosen market, a point of movement can represent a pound, a penny, or even a one hundredth of a penny. You can find out what a point means for your chosen market on the deal ticket. The bet duration is the length of time before your position expires.
All spread bets have a fixed timescale that can range from a day to several months away. If Apple shares did rise in price, you might decide to close your trade when the sell price hits If the market had fallen in value instead — down to a sell price of 11, — you would have ended up with a loss.
Again, not including any additional charges. Find out more about how to spread bet and see more examples. It is important to remember that all forms of trading carry risk. So, although spread betting provides opportunities for profit, you should never risk more than you can afford to lose. When you hedge using a spread bet, you open a position that will offset negative price movement in an existing position.
This could be trading the same asset in the opposite direction, or on an asset that moves in a different direction to your existing trade.
For example, if you were worried that inflation might impact the value of your share portfolio, you might decide to take a long position on gold — an asset that typically has an inverse correlation with the dollar and can protect portfolios from inflation. If your shareholdings did decline, the profits from your spread bet on gold could offset any losses.
But if your shareholdings rose in value instead, this profit could offset any potential loss to your gold spread bet. Spread bets are not taxed. Discover more benefits of spread betting. Spread betting is a bet on the future direction of a market, while a CFD is an agreement to exchange the difference in the price of an asset from when the contract is opened to when it is closed.
There are a range of similarities and differences between these two derivative products. Take an in-depth look at spread betting vs CFDs. Discover more about risk management , including what leverage is and how it impacts your trades. Dividend payments have no impact on your spread betting position. Tax law may differ in a jurisdiction other than the UK. Interested in opening an account? Contact or newaccountenquiries. Email newaccounts.
Professional clients can lose more than they deposit. All trading involves risk. Past performance is no guarantee of future results. The information on this site is not directed at residents of the United States, Belgium or any particular country outside the UK and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
Careers Marketing partnership. Inbox Community Academy Help. But its origins as an activity for professional financial-industry traders happened roughly 30 years later, on the other side of the Atlantic.
At the time, the gold market was prohibitively difficult to participate in for many, and spread betting provided an easier way to speculate on it. Let's use a practical example to illustrate the pros and cons of this derivative market and the mechanics of placing a bet.
First, we'll take an example in the stock market, and then we'll look at an equivalent spread bet. Note here several important points. Also, normally commissions would be charged to enter and exit the stock market trade.
Finally, the profit may be subject to capital gains tax and stamp duty. Now, let's look at a comparable spread bet. In making this spread bet, the next step is to decide what amount to commit per "point," the variable that reflects the price move. The value of a point can vary. In this case, we will assume that one point equals a one pence change, up or down, in the Vodaphone share price.
In the U. However, while spread bettors do not pay commissions, they may suffer from the bid-offer spread, which may be substantially wider than the spread in other markets.
Keep in mind also that the bettor has to overcome the spread just to break even on a trade. Generally, the more popular the security traded, the tighter the spread, lowering the entry cost. In addition to the absence of commissions and taxes, the other major benefit of spread betting is that the required capital outlay is dramatically lower. The use of leverage works both ways, of course, and herein lies the danger of spread betting. As the market moves in your favor, higher returns will be realized; on the other hand, as the market moves against you, you will incur greater losses.
While you can quickly make a large amount of money on a relatively small deposit, you can lose it just as fast. If the price of Vodaphone fell in the above example, the bettor may eventually have been asked to increase the deposit or even have had the position closed out automatically.
In such a situation, stock market traders have the advantage of being able to wait out a down move in the market, if they still believe the price is eventually heading higher. Despite the risk that comes with the use of high leverage, spread betting offers effective tools to limit losses. Risk can also be mitigated by the use of arbitrage, betting two ways simultaneously.
Arbitrage opportunities arise when the prices of identical financial instruments vary in different markets or among different companies. As a result, the financial instrument can be bought low and sold high simultaneously. An arbitrage transaction takes advantage of these market inefficiencies to gain risk-free returns. Due to widespread access to information and increased communication, opportunities for arbitrage in spread betting and other financial instruments have been limited.
However, spread betting arbitrage can still occur when two companies take separate stances on the market while setting their own spreads. At the expense of the market maker, an arbitrageur bets on spreads from two different companies.
Simply put, the trader buys low from one company and sells high in another. Whether the market increases or decreases does not dictate the amount of return. Many different types of arbitrage exist, allowing for the exploitation of differences in interest rates, currencies, bonds, and stocks, among other securities.
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