What Is Financial Spread Betting?

Financial Spread Betting

So What Is Financial Spread Betting?

Financial Spread Betting, is a means of taking a speculative trade (bet) on the financial markets, with the aim to making profits from either that derivative going up or down in value. The profits that are made in financial spread betting, in the UK, as it’s considered gambling are in fact tax free, which is one of the reasons why spread betting in the UK, certainly amongst traders, is so popular. As this is the only financial derivative, that can be traded (betted) on where the profits are subject to any form of tax.

There are some confusions associated with how financial spread betting works, how the trader makes their money, how the broker makes their money and more recently in the UK press, there has been a call to stop this method of gambling all together. However, given its popularity, this is highly unlikely.

I’ve been teaching financial spread betting since 2003, or more to the point technical analysis and using financial spread betting as a means to aid that understanding of how to trade professionally. I have seen some massive changes in the market over the years and financial spread betting has become massively popular – I would easily say that it’s as popular as Forex trading in the UK. Financial Spread Betting is available in many other countries, but rather amazingly, it can’t be traded in the US. There have been demands for something similar to be provided to traders in the US, but at the moment, this is unlikely to materialize any time soon. Having said that, if you are in the US and you are now feeling somewhat glum at not being able to trade financial spreads, don’t despair. Financial Speads are identical to trading any derivative, mostly, therefore, you can still open demo accounts, you can still learn to trade with us and you can still learn analysis with us too. I don’t want you to think that you will be left out.

First Things First

The first thing to understand about Financial Spread Betting is that it’s a leveraged trading tool, that does not have any actual intrinsic value – you do not own in any way what so ever, the item that you are trading on, the underlying. The underlying, the item you are using as a means to gamble on, is there simply for that purpose, nothing more. The advantage of this, means that as a trader, you can trade on virtually anything within the financial markets, from currencies, to stock prices, to Index markets, commodities, house prices and so much more. The benefits really are very broad. In that it allows you to trade the Forex markets, using the exact same methods and tools that you would use to trade the Forex market, but any profits you would make trading the forex market using financial spread betting, would be tax free. Where as if you were trading the forex market directly, through a FX broker, any profits that you made from your forex trading would be liable to tax.

Let me explain to you how trading in using financial spread betting is, then go back on the other articles and you will from looking at derivatives, forex and so on, that the methods are identical.

Derivatives

With most derivatives, as is the same with Financial Spread Betting, you can, in this case ‘gamble’ – as it is classed as gambling and I will explain why in a moment, that the underlying financial product will either go up or down in value – long or short. This position rather than being taken on the open market like it would be through a broker, is actually a contrary position taken against the ‘bookmaker’ the financial spread betting company that you have an account with. This is why it’s considered gambling, because you are simply stating to your spread betting firm, that you believe that a stock will go up in value, they take the converse position and if  you win, for each point (penny/cent) that stock went up if you went long, you would receive ‘stake x point rise = profit’.  Let’s say that the stock you traded was stock XYZ and it was at 100 and you thought it would go higher. You therefore trade £2.00 per point, for each point (penny/cent) that the stock goes up, you will gain £2.00, for each time the stock fell by one point, you would lose £2.00 per point.

Therefore, if you were expecting stock XYZ to go up in value and you closed the trade at 120, you would have made £40.00. However, if the stock had fallen to 80, and you closed the trade, you would have lost £40.00. Unless you had expected the stock to fall, in which case, you would have gone ‘short’ on that stock and would have made £40.00 from it dropping 20 points, but if it had gone up to 120 as before, you would have lost £40.00. As you can see, each trade, always has a converse trade.

The Spread Betting Company Want’s You To Win

Now one of the biggest misnomers about financial spread betting companies, is that there is the belief that they make their money when you lose money. This is not true. Unlike other ‘bookies’ they do not profit when you lose money. Trading, even in financial spreads is a zero sum game. Your losses, go on to pay someone else that is winning. The spread betting company, if it sees that they are overly exposed in one particular trade for example, will hedge the trade in the real market to protect themselves – this happens more than you imagine. Certainly if you are a successful and big hitting trader, chances are that the financial spread betting company will take an automatic hedge against your trade to protect themselves. Usually with the smaller trades they will not do this. They will only hedge against loss, if they see a trend in certain markets or stocks etc, and then hedge to protect themselves against having to pay out.

How then, do financial spread betting companies make their profits and why should you even worry about that? Well the hint is in the name of the derivative; spread. The spread, in this case, is the difference between the selling and buying price quotes, for example; our trade on XYZ would really have been ‘Buy at 102’ and ‘Sell at 98’ with the market price being at 100. The difference is the spread and where the broker makes their money. Therefore, with the trader going long and the stock price of XYZ being at 100, but buying at 102, the company makes £4.00 (if he’s trading at £2.00 per point) and the trader would not profit till it the market had reached 103.

One of the other misnomers is the fact that these companies want you to lose money. Well this is simply not true. If you lose money, you stop trading, if you stop trading, then the spreads company do not make their profit from the trades you open. Believe it or not and many do not but logic here simply prevails, is that the companies want you to trade and be successful. The more you trade, the higher per point you trade, the more profit they make, pure and simple. They are there to help you become successful, they, believe it or not, want you to succeed. Do not see the financial spread betting company as your enemy.

 

 What More Could You Want?

As you can see, financial spreads are a great way of getting access to many markets, trading them with relative ease and potentially walk away with making some good tax free profits. Do not be mistaken that because of the ease of opening an account and trading, simplifies making profits, it does not, far from it. The techniques, methods, tools, analysis and how the markets are driven, are almost identical to the rest of the real markets. You should as a result, treat it with a great deal of respect and understanding. You should learn about analysis, the underlying markets and how they work, everything you possibly can. You should open a demo account and learn how the systems work and how ‘you’ work under the pressure of trading and how good your analysis is.

Don’t forget that we will be launching our free, completely free, financial trader-training course, that will also have the option of actual support from me, Stu Whisson. If you want to make sure you are on the early bird access and to be notified when it is launched, please don’t forget to enter your name and email address in the box in the top right in the side bar.

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