While JP Morgan’s detailed 2023 report has forecast that stocks are likely to fall in the near-term against a backdrop of sluggish economic growth, it’s important to note that some financial market niches always perform better than others.
At the same time, speculative investment vehicles like spread betting also allow you to trade the price movements associated with assets such as forex and stocks, regardless of whether the underlying instrument sees its value rise or fall.
But what exactly is spread betting, and what are the main advantages of this strategy? Let’s find out!
What’s Spread Betting and its Main Benefits?
With spread betting, you’re essentially placing a wager on the direction that a particular asset’s price will take within a predetermined timeframe.
This makes it a speculative investment vehicle where you can trade price shifts without being encumbered with ownership of the underlying asset, enabling you to leverage market volatility to your advantage a realise a viable profit.
As spread betting negates the need to own a corporeal asset, you’re also afforded more flexibility in the marketplace and profit regardless of the prevailing economic climate.
Spread betting also enables you to target an array of financial markets as part of a diversified portfolio, including forex, stocks, commodities and a range of other options.
Aside from allowing for speculative investment across a broad range of asset classes, there are other significant advantages associated with spread betting.
For example, spread betting allows for tax-free trading, while the profits that you earn aren’t subject to stamp duty or broker commission. There’s no currency exchange risk, either, as you’re simply betting on whether a particular asset’s price will rise or fall.
What’s more, spread betting can be undertaken with a relatively small amount of starting capital, thanks largely to the leveraged nature of the investment vehicle and the ability to trade on margin.
What’s Leverage and How Does it Work?
When spread betting from a margin account, you can access leverage across certain markets and asset classes.
Leverage essentially allows you to open disproportionately large trading positions with a small cash deposit, while smaller margins correlate directly into the need for less initial capital.
Leverage varies from one market to another. When trading major international stocks such as Tesla, Amazon and Apple, for example, leverage ratios start from 5:1 or a 20% margin rate. Conversely, leverage of up to 200:1 may be available when trading forex, and in this instance, spread betting can unlock potentially significant returns.
Just remember, leverage can also increase the scale of your losses in addition to driving significant gains. So, you’ll need to factor this in when spread betting and manage leverage conservatively.
Getting Started and Devising a Viable Plan
If you are to leverage a profit while spread betting, you’ll need to implement a considered trading plan and strategy.
A key component of this is selecting the right markets, while tailoring your leverage and creating positions that strike the ideal balance between optimising returns and preventing seismic losses.
In order to further manage your risk, we’d recommend utilising so-called “stop loss orders”. These can be used to automatically close open positions before they incur a predetermined level of loss, helping to preserve your capital in instances where the markets turn against you.
On a final note, we’d urge you to make use of a demo account before trading with real money. You can access this through a broker (usually for a period of six months), during which time you’ll be able to experiment with spread betting strategies in a simulated market environment without risking your hard-earned cash.