Definition of Spread Betting
Spread betting is a type of financial derivative product, where the trader can perform speculation on the price of the assets, whether it will rise or decline without any need of being an owner of the assets.
When there is trading in the stock market, the broker proposes two prices for the traders willing to do spread bets. The one among them is the price at which the trader can buy or bid price and the second one is the price at which the trader can sell or ask price and the discrepancy between these two prices is known as the spread. In such types of derivatives, there is no need to pay a broker with fees or commission as the broker makes his profit from the spread between the two prices. The trader will go with these prices according to the market circumstances as if the market grows then the trader will go with a bid price and if the market declines then the trader will go with the ask price.
Features of Spread Betting
The following are the main features of spread betting:
- Appropriate Decision: The spread betting enables the trader to make an appropriate decision about whether to keep underlying assets for a little longer or to get rid of them according to the market conditions of rising and declining trends.
- The Use of Leverage: The leverage in the spread betting helps the traders in getting the full disclosure of the market’s underlying costs as well as there is a broad variety of markets accessible in it.
- Margins: There are two types of margins in spread betting namely deposit and maintenance margin. The deposit is related to the fund used to get a position whereas the maintenance margin is the extra fund use to maintain the position.
How to Conduct Spread Betting?
Like any other type of trading, spread betting also requires a broad level of research as well as the knowledge of the market because only then investors can predict whether the market will rise or decline. There are three components of the spread betting working procedure. ‘the spread’ is one of them which is the charge the trader pay to open a position, the second of them is ‘the bet size’ which is the sum of capital the trader put in it and the last component of it is ‘the bet duration’ which shows how long the position will remain open before it expires.
Example of Spread Betting
Let us assume XYZ Ltd Company is presently having a buy price of $ 195.19 and the corresponding ask price is $195.04. Suppose a trader P has expected that the price of shares of this company will increase soon. So,P decides to buy more shares for $10 per step of the shift in $195.19.
- If in the future, the share price of the company rises trader P will decide to close the trade at the point where the ask price touches $195.49. As the market is now increased by 30 points, P will earn a yield of $300.
- However, if there will be a downfall in the market, say to an ask price of $194.49then such trader will face a huge amount of loss. As the market has the downfall of 70, the amount of loss will be $700.
Both these amounts, either profit or losses will be exclusive of additional charges.
How to Make Money from Spread Betting?
A trader with a high level of research and broad knowledge about the market has the opportunity to make money with spread betting. If the trader’s predictions on the price of the assets are correct then the trader will get a profit on it depending upon the spread; spread refers to the variation in between the bid price and the selling price. If there is an increase in this difference, the trader will get higher profit whereas there is a risk involved in it too, like if the difference in the spread is declining or the bid price is lower than the selling price then the trader would suffer a loss on the bid. It is a kind of speculation process.
Leverage in Spread Betting
There is leverage in the spread betting which is a wonderful component as it enables the trader to attain a great level of profit with their capital which could be less if there is no leverage. Leveraged trading can also be called marginal trading. The leverage is very effective in getting a high level of profit with less capital; it not only magnifies the profit but also magnifies the loss if there is any. So the trader must use leveraged trading carefully.
Following are the advantages are given below:
- Use of Leverage: Less capital can be used to get a high level of profit in the spread betting as there is leverage in it that helps the trader in maximizing their capital.
- Helpful in Making a Decision: The spread betting helps the trader in deciding whether to go long or short; if the market shows growth then the trader would go long or vice-versa.
- No Need to Pay Commission: The spread betting saves the trader from paying high fees or commission to the broker as the broker makes a profit from the spread so there is no need to pay.
Following are the disadvantages are given below:
- Risk: As the profit in the spread betting magnifies there is a possibility of magnified losses as well. If the asking price declines more than the bid price the trader would bear a loss on the bet.
- Margin Calls: In spread betting, the traders may get a position that is far larger than their accounts which could cause margin calls.
To organize an active market for both aspects of the competition, spread betting was initiated. It is a type of wagering by which merchandisers could attain acknowledgment of different kinds of markets just by depositing a minimal percentage of the general amount of trade. Traders can gain proceeds if the market runs as per the expectation. Traders need not expense any kind of additional charges like a commission for trading, capital gain, or stamp duties.
This is a guide to Spread Betting. Here we also discuss the definition and how to conduct spread betting? along with advantages and disadvantages. You may also have a look at the following articles to learn more –