What is spread betting?

Traders looking for exciting ways to invest are taking advantage of newer products that have been entering the market in recent years. Binary options, for example, are very well known among the trading community, as their popularity growth has been exponential across the globe. Another option, called spread betting, is also taking the world by storm as traders discover its significant profit potential.

What is spread betting?

Just like binary options, spread betting is a type of derivative product. It is also a leveraged product, which means that only a small deposit is required to enter a position. This form of trading involves betting on the direction of a market (whether you believe it will rise or fall), not trading it directly, such as with traditional markets. All assets are open to this form of trading, including indices, currencies, stocks, and commodities, within over 10,000 markets.

Spread betting has significant risks and benefits. Traders partaking in this type of trade must weigh both sides carefully before entering a position. Since you are only required to invest between 1 and 10 percent of the value of your position, the potential profits and losses will be significantly higher than your initial capital outlay.

How does it work?

Upon deciding on a specific market, you are given both a buy and sell price for it – this range is called the spread. If you believe the underlying market will rise, you open your bet at the buy price, but if you believe it will fall, you go with the sell price. If the market sways towards your prediction, you profit (the closer the greater the profit). If it goes the opposite direction, you lose (the bigger the difference, the bigger the loss).

How should you mitigate risk?

Risk management is at the heart of any serious trader’s strategy. First, you need to determine your trading plan. This helps you make concrete financial goals and determine your financial limitations. Second, you need to work diligently on developing your skills. This is especially important if you are new to leveraged products. Many brokers have devised features for new traders, which allow you to take it slow at first. These include minimum deal sizes for a two-week period and reduced commissions for 6 weeks. Third, you must gain a thorough understanding of the markets you are betting on; knowing which factors influence various markets will make you a better trader as you will be able to focus on the most pertinent information to make your decisions.

Spread betting is for traders looking for extra flexibility with their capital, as well as for those who like to diversify their portfolios. If you have a strong interest in markets and their underlying influences, you will enjoy this new way of taking advantage of price movements.