Is spread betting for me?

Spread betting is short-term, high-risk investing - you can win big profits and incur equally large losses. It isn't for everyone so how do you know whether it's for you? Tim Bennett lists the three questions you should ask yourself before you try your hand at spread betting.

Markets are pretty volatile just now. And that opens up opportunities for spread betters and other traders. But for someone who has always invested in stocks and shares, is it worth making the leap into a new way of trading? Here are three things to think about before deciding whether to take the plunge.

Am I a short-term trader or long-term investor? Investing is all about spotting shares that are cheap right now and also a solid bet over afive to 50-year time horizon (US investor Warren Buffett once quipped that his preferred holding period was "forever"). Spread betting on the other hand is about seeing the opportunity to make a quick buck and repeating similar trades many times over to make a profit. These are fundamentally different approaches that require very different mindsets. Of course it's possible to spread trade purely for fun too but at that point your odds of making money are about the same as someone taking a punt on the horses. Serious spread betting involves more commitment in some ways than serious investing.

Am I happy to take risks? Spread trading is leveraged, or geared. A small initial deposit can lead to big profits or losses. It's also much harder to 'ride out' a loss making position as you can with shares. In short, you need to make sure you are not just seeing spread betting as an exciting way to make a fast buck (although in fairness it can be precisely that!) without understanding that you can also lose money fast. Don't forget that for every successful trade, there's an equal and opposite duff one.

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Am I self-aware? Successful spread betters are able to sit back and analyse every trade and ask themselves whether any profit they make is the result of luck or judgement. It's vital to be able to distinguish the two so you can build a successful strategy. That means it's no place for anyone who can't stomach short-term cash losses. And it's also not suited to anyone with a huge ego if you refuse to acknowledge a lucky trade, sooner or later your luck, and your money, will run out. The same is of course true of share trading except that a share trade can only ever lose you 100% of your initial investment in a worse case. Get a spread bet wrong without an appropriate stop loss in place and you could lose your shirt potential losses can be unlimited.

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.