What is spread betting?
Spread betting is a way of speculating on a future event and profiting from it. Spread betting originated in the world of sports events. The betting part of the name is the stake placed on an event occurring, for example, soccer results, or winning margins. The spread part of the name is the amount taken by the bookmaker.
Spread betting was then extended to cover financial markets, for example, is the stock market going to rise or fall today? And by how much? This video is limited to the use of spread betting in the financial or trading arena, where traders speculate on the direction of price movement. Pretty much any financial instrument can now be traded using spread betting. As speculation is on the direction of price movement, up or down, it means spread betting can be used to produce profits when prices are rising AND when prices are falling.
You’ll be able to open a spread betting account with a broker, although spread betting is not available in all countries. If you’re unable to obtain a spread betting account, you’ll need to trade currencies through a Forex account instead.
.Suppose I am trading EuroDollar and I expect the exchange rate to rise. The broker shows me the prices at which I can buy and sell this currency, buy at 1.2520 and sell at 1.2518. Ooops, the price has just changed. That often happens when you are preparing to trade. I am going to take a long position in Eurodollar, which means buying the currency. My trade amount is expressed as an amount per pip, in this case, I am trading at £5 a pip. The amount you trade per pip is determined by the process called trade sizing. I have £10,000 in this account and I am limiting my risk on this trade to just 1% of that amount, or £100.
A pip is the currency number expressed to the fourth decimal place on most currency pairs. In this case, a movement from 21 to 22 is 1 pip. A movement from 21 to 20 is also 1 pip. As I take the trade and buy the currency, my position is shown along with the original purchase price, 1.2521. The current price is shown, 1.2519, which is the price I will achieve if I exit this trade right now. A running profit and loss is shown as well. I’m currently down 2 pips, the difference between the buy price at 21 and the sell price at 19. At £5 a pip, this is £10.
Let’s watch this as the price changes. Notice as the price increases, my P&L position improves. Now the price has moved 2 pips, I’m breaking even. Each pip of price movement is worth £5.00, as that was my initial stake. As the price continues to move in my favour, the profit on the transaction grows. The price has moved 7 pips above my entry price now.
This transaction has reached my target price of 20 pips profit. Let’s close the trade and bank the profit. 20 pips of price movement didn’t take long in this video. Sometimes, the market will be even quicker than this video. Let’s run through the trade. When I closed the trade, there was 20 pips of profit, the price having risen in my favour as I’d bought the currency. This adds up to £100, as my stake was £5 per pip.
Had I staked £10, my profit would have been £200, 10 multiplied by 20. And so forth. Of course, if the price had moved in the opposite direction, my losses would have accrued at the same rate, meaning a 20 pip shortfall results in a loss of £100. One of the strengths of spread betting is in its simplicity.
I used UK pounds to trade the Euro and the US Dollar and did not have to do anything other than open and close the trade. Another advantage is the profits are tax free in the UK and Ireland. Simplicity and tax free, great combination. Hold fire though. It is possible to make losses with spread betting when prices move against you.
You need to understand risk management fully, plus the use of stop losses. It’s not just when prices are rising that you can make a profit, you can profit just as easily from falling prices by short selling.
Forex brokers will often encourage you to invest and make a profit, one method To do this is by providing bonus funds and other promotional offers, bonus funds Are not cash, they need to be reinvested before they can be withdrawn, usually Between 20 and 40 times, following a $50 bonus for example at a twenty times rate You must open new trade at a total value of $1,000 to withdraw that fifty, on the Other hand with Alvexo.
You have no transaction fees for commissions, instead We charge a spread, the difference in the rate at which you can buy and sell A currency is no different than a bank or the currency exchange abroad.
The value of a Currency is always quoted in pairs, the first number being bid price for selling The currency and the second which equals the off price if you want to buy the Currency obviously the bike prices higher than the sale price and that’s How you broke makes his profit, just like a bank or money changers spread is a Function of supply and demand your account and your turn over, the more you Trade the lower the spread.