There are many benefits associated with financial spread betting. One, the profits you get through this type of trading is completely tax free. Secondly, you do not have to pay any unnecessary commissions. However, you will be required to pay some money to the betting company based on the spread, that is, the difference between buying and selling price.

Another benefit is having access to most of the global markets 24 hours, 7 days a week. You can do your stock trading in multiple markets through only one account. You also get to choose the currency you think is most appropriate for you, thus you will be saved the trouble of having to pay for currency exchange. Financial betting allows you to bet on movement of the market prices. You can go long or short, but either way, you can make a lot of profit if the market prices move on the direction of your bet.

All investments that deal with shares, currency or stock trading have to have an element of risk, and financial betting is of course no exception. Loses in this type of investment occur when the market shifts in the direction opposite what you placed you placed your bet on. You can monitor your funds, and maybe control your loses through some of the stop loss mechanisms available to you.

One of the forms of betting that is similar to spread betting and equally popular among many people involved in stock trading is contacts for difference, or CFDs trading. However there are a number of differences between the two. There are no commissions, but in CFD trading you have to pay some commission. CFD trading is subjected to Capital Gains Tax while financial betting is not. There are no dividends in spread betting, but CFD traders do get dividends when possible.

Binary bet is yet another betting option that has more or less the same properties as financial betting. However, unlike spread betting where prices are based on the underlying instrument price, the price of a binary bet is based on the odds of the occurrence of an event. Binary betting is popular among stock traders since it offers a lot of flexibility.

Opening a spread betting account does not involve much. You can open one online or through the telephone. Spread betting offers a very simple way to gain when the stock trading market seems to be falling. Financial spread betting is not the best option for making a long term investment plan. However, this type of trading is appropriate for those who would like to make short term profits from stock trading.

Find out more about Financial Spread Betting Guide and Compare Financial Spread Betting Brokers.

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1) Always understand your market. A range of fundamental factors will have the potential to move the price of an asset and it is always useful to be aware of these. As an example, a change in interest rate policy can impact exchange rates whilst earnings news will directly influence a company’s share price. If you’re looking for a longer term trade, you should give some thought to just how volatile the market can get while you have an open position and either adjust your stop loss accordingly – or perhaps close out the trade for a day or two.

Example: Legal and General came out with half year results on Tuesday 4th August. The share price quickly plummeted over 12% as traders reacted to news of a dividend cut and a 92% slide in profits for the first six months but a rebound followed in an hour or so as the detail was digested, leaving the stock little changed over the first half of the week.

2) Don’t spreadbet in the short term. Investment banks don’t make the bulk of their money buying and selling on a minute-by-minute basis for a 1p or 2p profit each time, but rather by taking a considered opinion on where markets will move in the longer term. Although frequent trading may present some small profits, the temptation to panic and cash out too quickly has the potential to significantly limit returns. Many people are initially put off trading because they can’t sit their and watch the screen all day – but you don’t have to. If a longer term view is taken on a market and risk management tools such as stop-losses are used, there is no need to fret about what is happening second by second and this can end up being a far more disciplined, stress free approach to the markets

Example: The FTSE-100 will move up and down in rapid succession over the course of the day, but will tend to trend in the longer term. The index is currently sitting 1200 points – or over 30% higher – than its March lows. This shows the erratic price movements on a minute by minute basis and with this comes the potential to realise only small parts of any rally.

3) Understand your risk and spread bet accordingly. Risk management is important in any trading strategy and especially when you are using a leveraged product such as spread betting. When you place a trade, you should also decide where to take your profits and where you are comfortable to walk away from a losing position.

Example: On July 17th the British Airways share price reached 140p for the first time in over a month. Confident that the stock was undervalued and that support would now be seen for the business, you open a spread betting account, place £250 on deposit and buy at £10/point. This means, for each 1p the share price rises, you profit by £10 and for each 1p the share price falls, you lose £10. The share is now trading at 160p, so you should be holding a £200 profit (£10/point multiplied by the 20 point movement), less financing charges which on this trade would run to around £3 but the share did trade lower towards the end of July. Whilst taking advantage of the leverage available from trading derivatives, you should also ensure that you have an adequate buffer or cash cushion in place to prevent any open positions being stopped out. In the above example, trading £10/point on a £250 deposit would generally be considered high risk and a smaller position would be a more prudent way to try and ensure profit in the longer term. Even at £1/point, the above scenario would have given close on an 8% return on the £250 initial deposit over a three week period.

4) Diversify. Don’t put all your eggs in one basket – create a portfolio that will offer you the opportunity to have exposure to a range of different assets. Again this is core to any prudent investment strategy and rather than putting your faith in the fortunes of a single instrument, a degree of diversification is incredibly useful. It is worth being mindful of the constraints above – don’t diversify so far that you cannot keep track of the fundamentals – but looking to make a return from maybe 5 or 10 different instruments means that even if you pick a few bad apples, you still have a fighting chance of realizing some profit. One of the beauties of trading markets using spread betting is you have access to a wide range of different assets: shares/commodities/currencies etc directly from one account, making it very easy to spread your risk and monitor any open trades.

Remember that financial spread betting is a leveraged product and can result in losses that exceed your initial deposit. Spread betting may not be suitable for everyone, so please ensure that you fully understand the risks involved.

For more information on spread betting visit IG Index.

Disclaimer – No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. The research does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. IG Index is authorized and regulated by the Financial Services Authority (FSA No: 114059).

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An exit strategy is a point of vital importance for successful financial spread betting, however, and an excellent way to implement the exit of a spread bet is through the use of a stop order. Placing a stop on an open position is all about exiting your position once the market is moving against you. If you have decided that a certain price movement would mean that you no longer wish to hold your position, a stop helps to enforce the discipline of keeping to that decision when the time comes and also executes your exit if you are not in a position to monitor the market.

Given that a stop governs your exit and that when you exit is at least as important as when you enter a trade, it is worth putting some careful thought into where to actually place such an order.

It is therefore worth avoiding placing a stop at arbitrary levels – a common mistake from my own personal observations of spread betting clients historically – such as placing a stop at a level that is a round number or setting the stop a round number of points away. One of our most popular market is the FTSE 100 index, and I often see stops being placed 50 or 100 points away or set at 4600 or 4650 and so forth. These stop levels are clearly not being calculated in any logical manner; instead they are the result of a more whimsical decision-making process and therefore unlikely to yield satisfactory results.

A way to make the stop-placement more rational is to look at historical price data and make some kind of quantitative judgment.

It is also a good idea to match the stop level to market conditions and to the objectives of your bet. You should also take into account your own psychology and what suits your temperament.

For example, if you are looking to profit from a certain market move, the last thing you want is to have your stop hit by market ‘noise’ – random price fluctuations – so that you make a loss even if you are correct about the general direction of the market.

It would be a good idea in such a case, therefore, to take into account the volatility of the market. A wider stop would match a generally more volatile market, whereas a tighter stop might be a more suitable option for quiet market conditions.

One measure of volatility that is often used by technical analysts is Average True range (ATR). The ‘true range’ of a market includes the previous day’s closing price when determining the range (so that if the previous day’s close lies outside the normal day’s range it is used as either the high or low price). The ATR is then an N-day moving average of the true range values.

Using a tighter or wider stop strategy should also be a function of your overall trading approach. For example, you might use a tight stop if you are looking to trade over a short time frame when you think a major price change is likely. The benefit of a tight stop is, of course, that it means you are risking less money. At the same time, it also means that you are more likely to be stopped out for a given level of volatility and this is where you have to take into account your own trading style: if you can’t stomach a lot of small losses, it follows that regular usage of tight stops is unlikely to suit your mindset.

Unfortunately there is no golden rule for precisely where is best to place a stop: however, there is a golden rule of trading that says that you should aim to have the average amount you make on your winning trades substantially exceed the average amount you lose on your losing trades. Placing a stop loss that quantifies your downside for each trade, therefore, provides you with a benchmark for how much profit you should be aiming for (for example, if you are consistently working with stops risking 70 points, you should not be grabbing 20-point profits).

Pure Deal is one trading platform and it offers a free trailing stop functionality: this automates the process of following the market and therefore saves you a lot of time and trouble. If the market moves in your favor, it is possible to set a stop that will move up with the market, an elegant way of attempting to lock-in profits.

IG Index can help you improve your knowledge of spread betting and the financial markets with a full education program. Trade Sense is a completely free six-week course and includes a 100-page guide to spread betting.

Remember that financial spread betting is a leveraged product and can result in losses that exceed your initial deposit. Spread betting may not be suitable for everyone, so please ensure that you fully understand the risks involved.

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Betting on the financial spreads is different from normal betting at a traditional bookmakers. Instead of betting on a final event, you are buying points. It is easiest to explain with the use of an example.

Traditional Bookmakers
Two scenarios

* Winning: You bet £10 on a horse at odds of 5/1. It wins! You claim your winnings £50 + your original £10 stake.
* Losing: You bet £10 but the horse loses. You lose your original stake of £10.

Spread Betting

1. Your stake is £10 per point and you buy FTSE 100 index at 3000.
2. The FTSE 100 index rises by 100 points.
3. You decide to sell/end the bet. You win £10 per point risen (100×10 = £1000).

BUT: If the FTSE 100 index falls by 100 points, you have lost £100. It is at that point that you must decide whether to sell and take a loss, or hold your bet and wait for a recovery. This is the element of danger involved in financial spread betting. You can win money very quickly, but you can lose more money even faster! It is a game to always play with caution.

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