Successful spread betting can make you money far faster than simply buying, holding and selling the underlying securities, such as shares. That is because spread bets are 'geared', whereas share purchases are typically not. Here's a reminder about how this works and the consequences for your trading strategy.
Investors who stick to say trading shares make money if they pick the right ones. But they typically do so slowly and at relatively low risk. For example spend £10,000 on 1,000 shares at say £10 each and if they rise in price to £12, you make £2000 if you now sell (ignoring dealing costs and tax). So you've made a 20% profit. Had the deal gone wrong you could have lost a maximum of the full £10,000 invested up front but only if the share price had slumped to zero.
Now take a spread bet on the same shares. Let's say you place an upbet at £20 per point at a price of 1000p (we'll ignore any bid to offer spread for this simple example). A point here is a 1p movement in the share price. Your broker asks for a deposit upfront 'margin' of 20% of your initial total exposure. Here's that's 20% x £20 x 1,000, so £4,000. Now let's say the spread bet price move up to 1,200p. You sell the bet for a profit of 200 points, all at £20 each, so £4,000. In short you've doubled your money. Close out the bet and you get your £4,000 profit plus the initial deposit of £4,000 back.
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But there's a catch. Suppose the share price, and the associated spread bet prices had both fallen. Let's say you place the same opening bet at £20 per point and the bet price falls to 600p as the share price plunges. Your losses are now 400 points x £20 or £8,000, twice your initial deposit! To stop this happening we recommend stop loss orders indeed in a volatile market your broker may even insist on one. These get you out of a losing bet at a pre-agreed price (for maximum security consider a 'guaranteed stop').
Finally note that the 20% deposit rate is not set in stone. The percentage will vary depending on what you are betting on the more volatile the security, the higher the initial deposit. So always check the level of any margin required by your broker before you bet as it can change depending on market conditions.
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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