About Stu Whisson

Stu Whisson has been a member since November 7th 2012, and has created 18 posts from scratch.

Stu Whisson's Bio

I am one of Europe's leading online trader trainers, who in 2003 created one of Europe's leading trader training websites. Now in 2013, I am producing the very first time a complete financial spread betting and technical analysis course, that is totally free, but completely immersive in terms of analysis training, which, when finished will be the most complete and free online analysis course available.

Stu Whisson's Websites

This Author's Website is http://financialspreadbet.com/

Stu Whisson's Recent Articles

The Life-Cycle of a Spread Betting/CFD Trade

The Basics

Spread betting companies quote a two way price known as the spread that consists of a bid and offer price (or sell and buy price). Basically, you can bet on the price going down (known as going short) or up (known as going long).

When placing your bet, you need to determine the length of time you would like the bet to run. This can vary widely from just one day, a specific month and even till year end. However, the dynamic nature of spread betting means that it generally favours short to mid-term speculators because of the cost of financing a long term trade can get expensive (refer to section on financing charges for further explanation).

All spread bets have an expiry date which is when your bet is automatically closed, and the last dealing date, which is the last date possible that you can close out of a trade before it expires. Of course, with spread betting you can close out of a trade anytime before the last dealing date.

Choice of Trades

Spread betting firms offer a wide range of markets to speculate on from financial instruments, such as equities and bonds to the outcome of sports matches. Generally, however, most spread betting firms focus on trading financial instruments. A spread betting platform will feature a search function that allows you to view the different instruments available to trade.

Spread betting uses leverage in order to maximize returns, so make sure you have a clear understanding of the downside risks, it is very important that you carefully study the financial instrument you are trading in before placing your order. Get an understanding of the volatility of the price moves over time, through use of charts and intra-day high/low price date.

Placing an Order

Once you have decided which financial instrument you wish to speculate on, and have calculated your downside risk, you can go long or short by either buying/selling at the current market price otherwise if you have a specific entry price than you can place an order to execute a trade when the bid / offer price reaches a particular value in the future.

Margin Call

Spread betting trades on margin which means that you must place a cash deposit with the broker (spread betting firm) that is a percentage of the amount that you wish to trade as collateral for any losses you incur from that trade. This is calculated by differently by each spread betting firm and will differ depending on the volatility and nature of the spreads traded.

In the event of an adverse price movement against your account, the broker can issue a margin call requiring you to place more funds into the account to cover the losses that you are incurring. This is done to protect the brokerage from taking a too large hit from the price drop and to allow you to continue to keep your bet open. If the call is not met, brokerages are entitled to automatically close out your trade and possibly your account.

Opening and Closing a Trade

Example

The spread betting agent offers you a spread on the FTSE 100 at 4200 – 4202. You go “short” (predicting a price decrease) and open the trade by selling at the bid price of 4200, placing £1 per point. The price does fall and the new spread is 4148 – 4150. You decide to pocket the £50 profit by closing out the trade at 4150 offer, which is £1 x (4200-4150). Going long and short and understanding which price you are paying in terms of bid(buy)/offer(sell), can be confusing for beginners, but the table below should try to explain the relationship.

OFFER (SELL) = Where the counterparty are willing to sell to you
BID (BUY) = Where the counterparty are willing to buy from you

How it works?

Regardless of the type of spread betting transaction you are undertaking (sports or financial), you will abide by the same basic principles when it comes to the process of buying and selling.

So how does spread betting work?

Let’s look at spread betting in the realm of company shares for this example.

Basically it all starts when the spread betting firm quotes a betting spreads on their estimate for the outlook on a share.

As the spread better, you then decide on whether you think the quoted price is likely to be higher or lower. You spend time studying the betting spreads and decide whether or not there is a spread betting option there for you.

To rewind for a minute here and put the whole concept of spread betting into perspective quickly first – this will help you to get betting spreads and spread betting specifics firm in your mind.

Think about the process when you originally approach your stockbroker if you’re seeking to buy shares you will get two prices given to you.

  1. The Bid price – this will be the lower of the two prices and you will likely get this if you are selling the shares
  2. The Offer price – this is the higher of the two prices and this is what you will pay if you are buying shares.

The difference between the Bid price and the Offer price is known as a “spread”. This is why we say we’re “betting spreads” when we are spread betting.

Following?

Okay back to our example on how spread betting all works.

So when it comes time to hedge your bets on betting spreads in the world of spread betting, you will sell your bet at the Bid price if you think the share is likely to lose ground.

If you think the share is likely to gain ground, you buy at the offer price.

This is the crux of spread betting right here.

Now the fun begins!

At placing your spread betting bet you now need to decide what your wager will be. Make sure you spend some time considering the betting spreads here first – due diligence wins the race when you are starting out in spread betting.

You can wager your spread betting on a per-penny/cent basis or a per point basis, but keep in mind, if you bet on a share on a per cent basis at $1 you will win or lose $1 every single time the share goes up or down by a cent.

This could mean great wins if the share price soars, but it can also mean serious losses if the price takes a tumble.

The trick is to make modest bets when you’re first starting out in the spread betting game. Betting spreads is complicated – learn the ropes first, do a couple of small spread betting trials before you really get into the swing of it.

Let’s look at a Buy and Sell example so we can put it all into perspective.

For the purpose of this example let’s say you are betting spreads on the S&P ASX 100.

Times are tough and you are hedging your bets on the S&P ASX 100  in the near future due to poor employment statistics and slumping retail sales Down Under.

BUY

The Australian economy seems to be gaining strength, and you are heading your bets on the S&P ASX 100 gaining ground in the near future due to strong export sales out of the country.

You buy the S&P ASX 100 at 3601 and bet at £3 per gain point.

Each time the S&P ASX 100 gain a point you make £3, but alas, every time the S&P ASX 100 loses a point, you lose £3.

SELL

Times are tough and you are hedging your bets on the S&P ASX 100 falling in the near future due to poor employment statistics and slumping retail sales Down Under.

You sell the S&P ASX 100 at 3601 and bet £3 per loss point.

Each time the S&P ASX 100 loses a point you make £3, but alas, every time the S&P ASX 100 gains a point, you lose £3.

Worried about how much you could lose?

Never fear, you can choose to place a “stop loss” on your spread betting account so that, when your losses reach a certain value your bet is cancelled and you can lose no more.

There is no doubt that betting spreads is risky. You need to ensure you are willing to suffer losses as well as welcome in gains.

But with some practice and industry knowledge spread betting could be a very lucrative option for you .

Good luck!

What is spreadbetting…and why I like it

Spread betting is an exciting tax free way (in the UK) of earning extra money whether the stock market or the price of a share moves up or down.

It involves reading the chart of a share price to identify a chart pattern and then deciding how you think the share price will move. You are essentially betting on how the share price will move – you are not buying and selling the actual shares.

The techniques of reading a stock chart can also be adopted by those who buy and sell shares and where spread betting is not allowed e.g. USA.

How does spread betting work?

Let’s say that after studying the chart of Goldman Sachs you think that the share price will rise (this is called a bullish position).

In very simple terms, if you open a trade when the share price is $150.65 and you exit the trade when the share price is $151.83, you have gained 118 points (ignoring the spread for the moment). You have gained 118 points because 1 cent (or 1 pence) is equal to 1 point.

If you had placed a bet of £1 per point then you would have earned £118 tax free.

You can also earn money if you think that the share price might fall (this is called a bearish position). For example, you open a trade when the share price is $150.65 and you exit the trade when the share price is $149.33. Here you would have gained 132 points.

The risks involved

So far, so good. However, as with most things there are risks. With spread betting the risks can be high if you do not manage those risks properly. This is done with the use of a stop loss.

In our example above, if you adopted a bullish position on Goldman Sachs and entered the trade at $150.65, but the share price fell to $149.75 and you exited the trade here because of your stop loss, then you would have lost 90 points (or £90 if you traded at £1 per point). Of course, if the share price kept falling and you did not use a stop loss to exit the trade, then your losses would have continued.

Why I like spread betting

Gains are tax free

Anybody with a job has enough of what they earn taken by the tax man. Spread betting gives you a tax free source of income (in the UK).

You are in control

You are a very fortunate person if you are in control of how much you earn at work. For most, their pay cheque is decided by other people. Spread betting gives you control over how much you risk on each trade and when you can exit each trade and take your profit. Spread betting also allows you to protect your gains should the market move against you.

It is enjoyable

Spread betting is fun! It feels good when you have analysed the chart of a share price and have correctly predicted how that share price will move.

Make gains whether the market moves up or down

With spread betting you do not purchase any shares, you place a trade depending on if you think the share price will move up or down. If you’re right, you earn tax free money.

Funding requirements

You can begin spread betting with less than £100!

Trading Versus Investing

Often when people are new to the financial markets, they get confused between investing and trading. After all, they both happen in the same place, and the goal of both is to make money. The truth is that they are really very different in the approach that you have to take.
 

Trading versus Investing

Investing is typically for the long-term. You invest in things that you think will go up in value, and that can include not just stocks and shares, but antiques, real estate, collectibles, gold, in fact anything that does not inevitably deteriorate and lose value. It is an excellent plan for everyone to have some investments, with the goal of protecting against inflation in the long-term as well as increasing in value over and above the rate of inflation. It is a good idea to diversify your investments, as this provides some protection from any particular item falling in worth. For the financial markets, investors would typically use fundamental analysis to identify areas of potential profit.

Trading on the other hand is typically short term and speculative, some would say risky. It takes place on the financial markets almost exclusively, although some people try and profit from trading or buying and selling goods through eBay and the Amazon marketplace.

When you are trading you concentrate on technical analysis, which uses recent price and trading volume figures to attempt to anticipate where the price will be going next. Bear in mind that the price at any particular time depends on the sentiment of the market and how the shares are regarded by the majority of market participants. This may be different from any underlying value they may have.

As such, trading requires study and skill so that you can identify the opportunities. With the practice of finding short-term gains, any money that you win that is more likely to come from a losing trader than to be a fundamental increase in value. This means that you must constantly be learning and applying your best judgment to determine which way to trade.

The advantage of trading is that you can achieve much greater gains than with investing, and can see results in a much shorter time. This also means that you can lose more quickly, if you do not apply the right strategies. Trading can take place on many different financial instruments, including the leveraged derivatives such as futures contracts and spread betting, which will multiply the rate at which you win or lose money.

It must be said that while investing is a wise thing for everyone, trading does not suit everybody. Some people find it hard to achieve the appropriate mindset required for trading, and you will find out as you look further into it that the psychology of trading is one of the most important factors determining whether you will profit. Trading is often referred to as more of an art than a science, and having a mathematical mind is not necessarily an advantage.

One difficulty with trading is that you inevitably suffer losses as well as gains. No one can predict exactly where the prices are going, so you must learn to live with the ebb and flow. One of the secrets of successful trading is making sure that, whenever you take out a trade, what you stand to gain if it is a winner exceeds the amount that you could to lose.

If you want to succeed at trading, you need to test the waters to see whether you can approach it in the right way. After the initial learning and study of technical analysis, a process that you should continue throughout your trading career, you can see whether you have a propensity for the craft by opening a free or “demo” account and practising. Only once you are comfortable that you have a winning strategy and can trade effectively should you risk real money in the markets.

The Stock Market

You may have heard that the stock market is a place where participants buy and sell company stock, also known as shares as each stock represents a share of ownership in the company. This is true, but is a simplified view.

For instance, the stock market is really very many stock markets. Most countries have at least one stock market, such as the London Stock Exchange in the UK, and some countries like the US have several markets, including the New York Stock Exchange, NASDAQ, Chicago Stock Exchange, etc. Generally, the stocks traded in any particular exchange are those of companies with head offices in the country, but there are ways that major companies can have their stocks traded in other countries too.

 

The Stock Market

Increasingly, the buying and selling is done online, and the stock market does not have to be a physical place of assembly. NASDAQ was the first market which was fully electronic, starting in the 1980s as a bulletin board for dealers of stock prices, and going on to allow remote trading.

The price of shares depends on the supply and demand for them, and this is related to the expectation of a company’s performance, in other words what people expect it will be worth in the future. If the majority of shares are gaining in value, then it is called a “bull market”, whereas when prices are falling you are in a “bear market”. You can also be “bullish” or “bearish” about individual stocks, depending if you think the price is going up or down.

The stock market and other marketplaces will also trade “derivatives”. This is a general term applied to any financial instrument that derives its value from something else, with the something else being called the “underlying”. Commonly, the underlying may be a company’s stock or a commodity. When you trade derivatives, you never own the stock or commodity, but simply profit or lose according to how the price varies. This allows you to profit from a fall in price, known as “shorting”, which if you simply buy stocks you cannot do. One of the features of derivatives is that you can gain or lose much more than you trade, so it is even more important that you know what you are doing if you choose to trade them.

The typical participants in the stock market can be classified as “retail” or “institutional”. Retail participants include people like you and me. Institutional investors include pension funds, banks, finance houses, etc. You cannot buy shares directly from a stock market, you need to use a broker or dealer who is authorized to trade in the market. However, buying and selling is virtually instantaneous for most of the financial transactions that you will place.

The price of stocks and the other financial securities varies continuously while the market is open, and is based on supply and demand. If the demand goes up, which means that many people want to buy the stocks, then you can expect the price to rise. Conversely, if the supply goes up because many people want to sell, then the price will fall.

The price varies to try and achieve a balance between buyers and sellers. If the demand goes up, forcing the price up, it will reach a level where some participants no longer want to buy, so the demand will stabilize. When the supply is great enough to push the price down, then some sellers may think twice about whether they want to let their shares go so cheaply, and withdraw them from the market, reducing the available supply.

While the stock market provides a huge marketplace for speculators, its purpose is to make available a place for companies to raise money. Companies need money at various stages of their growth, and typically may want to fund expansion of premises, research, and other things. The process by which companies can ask for money on the market is called the Initial Public Offering (IPO), and this involves a lot of paperwork, which culminates with the company selling new shares to anyone who wants to buy.

The offer price of the company shares is carefully considered by financial advisers, but sometimes goes wrong, for example when Facebook recently went public and the newly issued shares soon lost value. Stocks are only worth what the market participants are prepared to pay for them. You will find out more about this aspect when you study market psychology.

What Is the Forex Market?

The Forex market is possibly the largest trading market in the world, with an estimated value of US$4 trillion traded every day. Unlike the stock or commodities markets, it is not concerned with any material goods or industries, but simply the relative value of different foreign currencies. Forex stands for “foreign exchange”, also known as currency exchange or currency trading.

Because Forex trading only involves currencies, and most trades involve very few currencies, it is very simple in concept. In practice, because currencies have so many factors that affect their value, it can be more complex to analyze than, say, a company’s accounts. However when you are trading, most of your opportunities will be identified with technical analysis, and therefore the background analysis of why changes happen is less important.

 

What Is the Forex Market?

When you trade currencies, you have to trade one currency against another. Currencies are always traded in pairs, for instance how many US dollars can I buy for £1? The answer to this at this moment is 1.6474, and the symbol used for this is GBP/USD or sometimes simply GBPUSD. This is one of the major currency pairs traded and is known colloquially as “cable”.

Whenever you see a currency pair, the first named currency, in this case the Great British Pound (GBP), is considered the primary currency, and the value quoted is the amount of the second currency, US dollars (USD) that can be bought with one unit of the primary. There are only about six currency pairs comprising the majority of foreign exchange trading, and they include the Australian dollar (AUD), the Canadian dollar (CAD), the euro (EUR), the Swiss franc (CHF), and the Japanese yen (JPY), with most of the pairs including the US dollar as the primary currency. In fact the preponderance of Forex trading includes the US dollar as one of the two currencies.

Although currencies have been bought and sold for years, the Forex market as we know it nowadays is comparatively recent compared to, say, the stock market. A while ago, many currencies were pegged to the value of gold or to other currencies, but this situation changed in living memory to allow full floating of the exchange rates. With the addition of the Internet, this has created an opportunity for members of the general public, known as retail traders, to readily join in trading the currency markets.

One of the reasons for Forex’s growing popularity is that the Forex market takes place around the world, and therefore can be traded 24 hours a day, 5 1/2 days a week (as they stop at weekends). This means that no matter what time of day or night you have spare for trading, you can find an active market. Most trading is short-term, with trades being opened and closed within minutes, hours, or at most days.

There is no central market, such as with stocks. The greatest amount of Forex trading takes place in London, but even this accounts for only one third of all transactions. Modern technology ensures that no matter where in the world you are located, you will have the latest price quotations available.

If you become involved in Forex trading, it will not be long before you hear the word “PIP”. This is a common measurement used by traders, and is the fourth decimal place of the value. That is why the quote above was 1.6474. If the value went up to 1.6475, it would have gained one PIP. Although as you can see the PIP is only 100th of a cent, an impossibly small amount, Forex trading deals in large amounts of currency which means that the profits and losses can be significant.

When you trade, you can choose either currency to increase relative to the other. If in our example you thought that the pound sterling was going to increase in relative value, you would place a “long” or “buy” trade on the pair, and if you favoured the US dollar you would “sell” or “short” the pair. It does not matter what your local currency is, you can still take either position.

With true Forex trading, you have set amounts or “lots” of currencies to trade. However, you can also trade on the Forex market with spread betting, and by doing this you can choose the amount that you stake. In either case, if you decide to try Forex trading you should look for the facility of a demo or free account so that you can practice without risking any money.