Are There Risks to Spread Betting?
Spread betting can be a risky type of financial speculation. In general, it is advisable to learn about the detailed nature of what spread betting is, how it functions in terms of making a profit or loss and what your exposure is. For many financial speculators, spread betting can be a suitable form of financial market trading, but it may not necessarily be right for you.
Leverage
In contrast to trading in shares, for example, spread betting losses can exceed your initial deposit, due to the leveraged nature of the product. Leverage essentially multiplies your profits and losses. What may seem like small movements in the financial markets can translate into much larger profits or losses. This is the appeal of spread betting for many financial speculators in terms of gaining profits. Leveraging is also known as gearing.
Monitoring Open Positions & Stop Orders
Even relatively stable financial markets can change course suddenly and without warning. There is no guarantee that past financial market performance will act as a foolproof guide to understanding their future direction. You should therefore always closely monitor your open spread betting positions. Due to the leveraged nature of spread betting, sudden upward or downward financial market movements can quickly result in large profits or losses.
You can limit your exposure and potential losses by placing a stop order on a trade. A stop order will close your trade if it starts to move against your position and it hits the market level / price that you set for the ‘stop order’.
Understanding the Underlying Market
Spread betting works by speculating on the price movements of financial markets such as forex, indices, shares, commodities or interest rates.
Currency fluctuations can impact your profits or losses. Volatility may be sudden and sharp in any financial market. Some financial markets can be volatile at the time you place your bet; you should understand that prices can go up as well as down and your losses can exceed your spread betting deposit.
Gapping is a sudden swing in an underlying financial market’s prices. Gapping can occur when, for example, there are significant market announcements or world events. This means that you can gain significant levels of profit or sustain significant losses, as the market swings upwards or downwards. As mentioned above, you can limit your exposure by placing a stop order, but you should be aware that there might be different options on stop orders. A normal stop order does not protect you against gapping, whilst a
guaranteed stop
does.
Spread Betting Accounts
There is a range of
spread betting companies
to choose from. By opening a spread betting account you become legally bound to a company’s terms and conditions. You should read these carefully as they may differ from one company to the next.
Before you start spread betting though, note that it is a geared investment product, it carries a high level of risk to your funds and can result in you losing more than your initial deposit. Please ensure that it fits your investment requirements as it may not be suitable for all classes of investor. Ensure that you only spread bet with funds you can afford to lose. Always familiarise yourself with the risks and request independent advice where you feel it is necessary.
The writer is a seasoned financial author offering strategic and tactical trading views on the
spread betting
markets.
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