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 Advantages of Financial Spread
Betting |
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| Financial Spread Betting is the crossover
between conventional betting rationale and investing in financial instruments
like currencies, indices, shares and commodities. It is simpler than sports
spread betting because you are simply betting on the price of whatever you are
trading to increase or decrease and the result is simply the price change
multiplied by your unit stake. |
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The are two other
ways to get involved with financial trading, one is actually buying something
to own or use a trading broker to bet against something, and the other is a
Contract for Difference (CFDs). The first of these is not really in competition
with spread betting.
Similarities and Differences – Spread
Betting and CFDs
Spread betting and CFDs are very similar in that they
have a buy and sell price with the spread between them constituting the
operators profit vehicle (CFDs on equities take a commission). They also both
have a standard tick size, the minimum amount that the price changes by, and a
minimum bet size, which is likely to be smaller for spread betting.
They
have two main differences however;
- Profits from Spread Betting in the UK are tax
free – not so for CFDs.
- Spread Bets always have a fixed closing date
and standard CFDs do not
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So
when you are deciding on your
online trading route
it makes a lot of sense from a UK standpoint to choose spread
betting.
Similarities and Differences – Financial Spread Betting
and Sports Spread Betting
Both have a price spread and a final make-up
price on completion of the event or a set time and date for financials. The
result is always the difference between the buy and sell prices multiplied by
the unit stake, whether positive or negative.
The first major difference
is that sports spreads can be more complex with multiple outcomes on offer as
with a multi-player index that dividends differently for each finishing
position. Financial spread bets are just up or down.
The second major
difference is that financials require a margin for a spread bet. In this
respect it is similar to CFDs. A margin is an amount of money in your account
that you need to put up against any possible losses. This is set by your
trading partner or broker but ranges typically from 0.5% to 3% of what they
consider to be a typical price movement.
For an example the FTSE 100 is
traded with 1 tick being 1 index point and the margin requirement would
normally be 0.5%. So in quiet times a large movement would be 100 points, so
betting £10 per point the large negative movement would be £1000,
therefore the margin is just £5. However with currencies the tick size is
usually 0.0001 of a dollar or pound so swings can be quite big and thus margins
are larger. This changes all the time and your trading platform will indicate
to you what you allowed to bet according to the amount you have sitting in your
account.
The third major difference is the notion of Stops. You can
preset the point at which you exit your spread bet. This has two main points.
Firstly you can exit the bet if it loses an amount you do not wish to go beyond
and secondly, exit the bet in profit without having to monitor the position
constantly. Using the FTSO example if you buy at 7,500 you can put Stops in at
7,400 and 7,800.
The fourth and final major difference is the spreads
will widen and shorten depending on liquitity which usually is linked to
whether the markets are closed, like the FTSE or quiet, like currencies when
London and New York are asleep. |
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