Spread Betting: Basics

This beginner's guide to spread betting discusses its benefits and potential risks.

W ith the credit crunch tightening and a recession looming, it may not seem a great time to begin playing the stock market. Shares in many major companies and financial institutions have fallen dramatically over the last few months, and this market downturn looks set to continue in the near future. However, there is a way in which you can still make money through speculating on the stock market.

CFD trading and spread betting is part of a new trend offered by specialist companies such as CMC Markets, which allows investors to bid on the direction of a particular stock or market without purchasing the underlying financial instruments.

Spread betting is the simpler of the two and is therefore favoured more by beginners. Although it is essentially gambling, most experts would contend that financial spread betting has a risk profile that is completely different from that of traditional betting.

How Spread Betting Works

Most newcomers to spread betting focus on the FTSE 100, since it is less volatile than the US market or indices. A spread better who believes that the FTSE 100 is going to rise might place an 'up' or a 'buy' bet with a spread betting company like CMC Markets. He could, for example, bet £10 per point at 4250. If the FTSE 100 then rose to 4430 within the time period stipulated by the bet, he would make a profit of £1,800 - i.e., 10 (the amount of the bid) times 180 (the points rise in the index). On the other hand, if the FTSE 100 fell to a level of 4070 during that same time period, he would lose an equal amount.

Benefits of Spread Betting

One of the more appealing aspects of spread betting is that it is possible to place a bid on a 'negative prospect': if you believe that the FTSE 100 is going to fall, you can place a 'down' or 'sell' bid. If your prediction proves correct, you will make a profit as substantial as you will from an 'up' bid.

Spread betting is a straightforward way to profit from markets that are either rising or falling. Before it was introduced, traders could only make a profit from a falling market through selling shares short, or perhaps through investing in hedge funds. Now, thousands of investors can benefit from the current negative financial climate.

First-time spread betters should always minimise their risks by placing a stop loss on their account. It is also advisable to practice spread betting using an online demo or simulator before engaging in regular spread betting.

The opinions and statements expressed in this paid article reflect those of its authors and not those of AlphaProfit.

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