Spread Betting in Financial Markets

One of the basic principles that stand behind the decision-making process of any financial market’s participant is the risk/reward trade-off, which determines the profile of the participant and helps him to identify the most suitable instruments to use in order to generate profits. Luckily, the evolution of technology has created a wide range of instruments that go far beyond the more traditional stocks and commodity futures. This has created a new type of market players, in addition to traditional investors, who are called speculators and who trade on different instruments with a higher-than-average risk, but can in exchange obtain profits that are considerably larger than those reaped by lower-risk stock market players.

One instrument that has recently become available for speculators who are looking to obtain large gains in short-term is financial spread betting. Spread Betting has actually existed for a long time and has been available as wagering at other events where the pay-off is based on the accuracy of the predicted results. For example, in sporting events there is a range of possible outcomes on which people are betting (called the spread) and spread betting allows to bet on whether the actual result will be above or being this range.

In financial spread betting, speculators are betting on price movement of a stock, index, commodity, currency, etc. As brokers quote two different prices for buying and selling (bid and ask) and the difference between these two prices is known as “the spread”, spread betting involves wagering on either the price will go above the bid price or below the ask price.

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Even though spread betting is considered a speculative way to make profits, some betters can actually use traditional analysis to increase their odds of winning the bet. Betters can identify resistance and support levels of a stock in order to understand the best level to cash out, or they can follow the news and place their bets based on the price movement that it expected to follow them.

Some traditional and more conservative traders can argue against spread betting, one of their main reasonings being the high level of risk, since spread betting does not have any underlying security. However, despite the risks, there is a number of advantages, which helped to push spread betting to become a very popular instrument in some countries, such as the United Kingdom, which is currently one of the largest markets for spread betting. First of all is the low barrier to entry (and low initial investment requirement) since spread betting does not involve any exchange clearing, and the transactions are made only between betters and the company that makes the market. Betters also have access to a wide range of markets, such as stocks, currencies, commodities, with some companies going as far as allowing bets on the movement of house prices. Aside from using strategies to maximize the chances of winning a bet, traders can also use either regular or trailing stop losses in order to minimize their loss. Therefore, a smart approach to spread betting can turn it into a solid income stream. And here comes one of the best aspects of spread betting: since it only involves two parties (the trader and the market-maker) it is very loosely regulated and doesn’t require to buy an actual underlying security, which in some countries (including the UK) means that profits obtained through spread betting are not subjected to tax payments.

The bottom line is that spread betting is a much easier way to tap into multi-trillion markets than traditional securities trading and even though it is a a riskier-than-usual way to generate money in financial markets, with due diligence and some research there are many ways to counteract those risks.