Spread betting can be risky. So here are three easy ways to limit the potential damage.
Spread watching
Remember that the more obscure the bet, the wider the likely bid-to-offer spread in 'pips' or 'ticks'. Although spreads might be tight on say the biggest forex contracts or the FTSE 100index, they can widen fast in less liquid markets say for house prices or less popular stocks. So always check this before placing a bet or you'll need a huge shift in your chosen bet target to just break even and recover the spread.
Limit orders
When market conditions are volatile (the start of the day is a good example as overnight orders all pile into the market together. Key data releases such as the US non-farm payroll numbers are another) either stay away altogether and wait for things to calm down, or use limit orders. These allow you to place an order at a 'no worse than' price. For a buy order on the FTSE 100, this would be, in effect, an instruction to your broker to "open my up bet but no higher than 5,000 points" [or whichever price you choose]. The downside is your order may never execute, or take a while to do so, but at least you know the price you will trade at.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Get 6 issues free
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The most popular alternative a market order will execute at the current market price with no limit. Practice using both on your broker's simulator before going live.
Stop losses
If you bet on a rising FTSE 100 using a spread bet, your risk is that it subsequently plummets. This might happen while you are in a meeting or playing golf, so you have no way of knowing, let alone stopping your position from racking up losses. Or do you? A stop loss order for which you typically pay a small premium in terms of a slightly wider spread cuts your risk. In effect, it says to your broker "get me out if the market hits x".
One step on is the guaranteed stop. The plain vanilla stop order may not get you out at the price you expect if it is competing with lots of other similar orders. That's a particular risk in volatile periods such as the credit crunch last year. But for a little extra on top, your broker will guarantee to get you out at the price you specify.
Public stock markets are shrinking: where could investors turn for growth?
Is property investment still as safe as houses? Why golden era could be over
