Gearing Up - Spread Betting
Spread betting is probably the simplest form of derivative trading around and is definitely the most tax-efficient. Spread bets permit you to bet that the price of an underlying asset (a share, commodity or index) will rise or fall. What this means is that you can hedge your existing holdings, perhaps betting on a fall in the FTSE 100 to offset the risk of a fall in your UK portfolio.
You can likewise use spread betting to speculate on your view of an underlying asset (a share price or index level, for example), either trying to profit from a falling price or hoping to make enhanced gains from a rising price. Betting on falling prices is called ‘going short’, while betting on rising prices is named ‘going long’.
The great advantage of spread betting is that gains are totally free from tax. It indicates you don’t have to pay capital gains tax at 40 percent (for higher-rate taxpayers) on gains over the annual exempt allowance, which is currently 9,200. On the other hand, you cannot offset any losses from spread betting on gains made elsewhere.
Spread betting is also extremely flexible and permits you to choose risk levels to fit your own circumstances. This is because the higher the degree of gearing (magnification) you use in the hope of increasing returns, the more your profits or losses will be enhanced.
For instance, you could set your gearing level at 10 times (10-1), where your profit or loss would change by 10p for every point move in the FTSE 100 index. If you were more confident (or could endure to make a larger loss), you could gear up by one thousand times, where every point move by the FTSE 100 would create a 10 change in the value of your bet.
Although spread bets can be kept open for several months, you must leave a deposit (known as margin) with your broker. A typical minimum margin level would be around 2,000. However, if you’re making a loss on your position, you need to top up the margin every day - even though you do not have to keep the bet open for as long as you intended at the outset, obviously.
If you bet on a rising price, you can make unlimited enhanced profits. Not to mention, if the market moved against you, your losses would be enhanced but capped, as the underlying price could fall no further than 0p.
However, if you bet on a falling price, your probable profits would be improved but limited. And if you bet on a falling price and it rose, your losses could be unlimited - therefore, the need to top up your margin (on any day you lose money) acts as a break and could force you to close a devastating position, instead of racking up huge losses, which would just be settled at the close of the bet.
You can likewise restrict your potential downside by means of setting a stop-loss with your broker. This would close your position, if the underlying price moved against you and past a predetermined level (falling 10 % below its opening price, for example).
Stop-losses shouldn’t be set too tight, however, because the underlying price could move against you before changing direction, which means you don’t want to be closed out too early. You can also use a trailing stop-loss, which keeps the same percentage-point distance but follows a rising underlying price up in a bull market, allowing you to lock-in some gains.
Spread-betting providers set their own spreads, that are not necessarily the same as the bid price and offer price for an underlying share. Thus spreads can be set a lot wider for spread betters (although, in theory, competition between brokers ought to keep spreads reasonably tight).
Frankly, though, underlying spreads on some shares can be as wide as 5 %, even though they’re usually much tighter for big, frequently-traded shares. It is because the wider the spread, the larger the movement needed by the underlying price for the bet to pay off.
You go long with a spread bet by ‘buying’ the underlying asset at its offer price and close it by ’selling’ at the bid price. To go short, ’sell’ the underlying asset at the bid price and close by ‘buying’ at the offer price.
The one difference is in foreign-exchange trading, sometimes known as forex, which is a form of spread betting. Currencies are at all times shown in pairs and you buy the one you think will perform better. For instance, if you think the dollar will fall relative to sterling, you have to buy sterling (versus the dollar).
In conclusion, spread betting is good fun, and pretty much anybody can enjoy the odd bet now and again. But if you would like to make money from spread betting, then it must be taken seriously and a disciplined and tactical approach is required.
Getting the best information on Spread betting is no easy task nowadays. If you are looking for more information on Spread betting, then I suggest you make your prior research so you will not end up being misinformed, or much worse, scammed. If you want to know more about Spread trading, go here: Spread trading
Tags: Gambling, spread trading
