Tempted by spread betting? For the right sort of investor, spread betting can be fast-paced, fun and a great way to make money. However before you take the plunge, ask yourself the following questions. They will help you decide whether it's really for you.
What is your strategy? Spread betting isn't like buying and selling shares as an investor. The time horizon is much shorter it's often minutes or hours for a spread better compared to months - or more likely years - for a share investor. So if you are the kind of person who likes to invest periodically and then sit back and wait for time to generate decent long-term returns, spread betting may not be your bag. It's not just an extension of share trading it's a different way of investing.
Do you have a high or low risk appetite? Spread betting is 'margined' a small deposit can get you a big exposure to shares, commodities, currencies or whatever else you choose to bet on. Sure, the downside risk can (and should) be mitigated with stop loss orders, but nonetheless spread betters thrive on volatility. If you have nerves of jelly, not steel, then spread betting will guarantee you sleepless nights and you should probably steer clear.
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Are you lazy? Buy and hold share investing suits many investors because it does what it says on the tin. Of course, once-solid shares such as BP can be rocked to the core by a one-off disaster such as the Deepwater Horizon oil spill, but this is the exception, not the norm. And besides, if you hold a portfolio of different stocks, a hit on one may well be balanced by a gain on others.
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Spread betters can't afford to be laissez-faire. It's unlikely you will be running more than a few bets simultaneously. You will need regular updates on your position fired to your desk, or mobile phone. You will need to be watching positions carefully, ready to open up a fresh trade or take profits.
You will also need the discipline not to invest to wait for days if necessary for the right chart pattern or volume signal. Sure, a lazy share investor can pile into a stock at the wrong point and might lose 10% quickly. That's bad. But for a spread better an unprotected move of that size, combined with a high bet size, could be catastrophic.
Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.
He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.
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