Spread betting can be rewarding. But it is also risky. Gearing the fact you only put down a small percentage of your total exposure in the form of margin held by your broker magnifies gains and losses. So for a novice in particular it's important to know how to keep losses low. Here are three ways to do it.
Choose low volatility targets
When my brother first made a share purchase it was on the advice of a friend. That friend suggested he sink £5,000 into an unknown Israeli internet start up. Two weeks later it folded and my brother lost his money. It was two years before he bothered with shares again! Likewise, as a new spread better don't go chasing highly volatile commodities or currencies. Start with say short-term (single day) FTSE 100 bets or bets on blue chip shares. Sure you can still lose money but hopefully you won't get wiped out on day one.
Pay for stop losses
A stop loss sets a trigger price at which your broker will try and get you out of an open bet. However if many orders flood the market also trying to exit at your price, you may get stopped out at a different price. So a 'guaranteed stop' is a more expensive order that gets you out at exactly the price agreed with your broker. You may baulk at the wider spread you will suffer for choosing this type of order, but don't. Better safe than poor.
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Understand bet sizes
If you bet on, say, the Tesco share price rising using a spread bet, and you set your bet size at £10 per point, your effective exposure is the same as someone who owns 1,000 Tesco shares. Knowing that is vital to forecasting likely profits and losses. Never place a bet you don't fully understand commodity contract sizes, for example, can be more complicated. If in doubt, ask your broker to explain how profits and losses are worked out (there is often a worked example on their website). If you are still not clear, don't bet.
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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