The most important question to answer before you follow the growing band of investors moving into spread betting is is it for me?
Don't just sign up because you've seen a sexy advert for spread betting, or because you've heard about the big profits that some people are able to make. Sign up because it suits your style and you think you could make some money.
To help you decide whether you want to go from share trading to spread betting here are three key questions to ask yourself.
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Are youan investor or a trader?
Shares are for the medium to long term. You buy on the best information available at the time, and then I'd suggest you don't review your portfolio more than once a year. Otherwise you will become a victim of overtrading and get hit too often for charges and commissions.
Spread betting on the other hand is all about the short term. Your typical time horizon will be well under a year and may only be a matter of days or even hours. It's more stressful you can lose a lot of money quickly but it's also more exciting and can make you money fast.
Do you like taking risks?
Shares can go down as well as up. But they tend to do so relatively slowly (with a few exceptions) and your losses are only 'paper'. That means you can opt to sit out a bad patch in the hope that share prices recover.
Spread bets are different in two ways. First off they are 'margined' - or 'geared'. In short, you get a lot of bang per £10 or £100 committed. This can work in your favour and magnify gains, or it can cause pretty big losses (although these can be mitigated with stop loss orders).
Next, in order to run a loss-making spread betting position you have to be prepared to fund cash calls from a broker. This is done via an opening deposit.
The scary thing about spread bets is that this deposit can get eaten up pretty fast if things go wrong. The result? Novices tend to panic and close positions too fast, taking a hit while doing so.
So, if you are risk averse, think twice about spread betting. If on the other hand you like a bit of spice in your life, spread betting opens up possibilities in terms of what you trade and how you trade it that share traders can only dream of.
Are you a jack-of-all-trades or a specialist?
Share traders can afford to be lazy. You could buy a well-diversified portfolio of blue chip defensive shares paying decent dividends and then sit back.
Spread betting requires focus you need to decide which market to specialise in (Shares? Rugby? Currencies? Commodities?) and then do your homework. For example, if you are planning to have a go at currency spread betting and you are not familiar with terms such as non-farm payroll data, CPI, Markit CIPS and GDP revisions, then you are in effect playing the lottery.
That's fine some of us are pure gamblers. But you'll be lucky to make any money.
