Almost all professional traders I know supplement their income using a spread betting account! Spread betting is the form of trading which most closely resembles professional trading and which enables ordinary private individuals to replicate real world trading in their own homes.
Of course, it depends on how much capital you will be putting up to play the trading game. If, for example, you have £2m to trade with, then you would need to trade specific markets through a broker (which in essence would amount to full time professional trading), or else get someone to manage your money for you! However, if you have less than £150,000 to play with (which the majority of people do) then spread betting is by far the simplest and most viable way to trade.
What is Spread Betting?
Spread Betting is a form of trading which gives you access to multiple global markets. It operates much like a stock broker share dealing account, the difference being though, that you can trade Forex, Commodities, Equities, Bonds, Options etc. all through one broker. Unlike other forms of trading, you don’t actually own anything when spread betting – you are merely shadowing the actual underlying stock or asset that you are trading. Spread betters simply speculate on whether the asset’s price will rise or fall, using the prices offered to them by a broker. It is very similar in nature to Contracts for Difference (CFD).
Spread betting unfairly has a reputation of being ‘pure gambling’, but this is not actually the case. It is fully regulated by the Financial Conduct Authority (FCA) and if you know what you are doing, it’s no more risky than share dealing.
Why do Traders Like Spread Betting?
- It’s ideal if you have between £1000 and £150,000 to trade with.
- It’s tax free in certain countries including the UK.
- Brokers in the UK are regulated by the FCA in most instances.
- It allows you access to multiple markets – Equities, Indices, Forex, Commodities, Interest Rates etc.
- It allows you to go long and short. (btw the short selling myth and how it impacts markets is rubbish!). You can’t go short in a standard share dealing account – you have to be a big money professional trader to get that sort of
- It allows you to create trading strategies that you wouldn’t be able to do elsewhere or unless you had a very serious size of trading fund.
- You can trade as big or as small as you like
- It gives you 24hr daily global trading, so you can fit it more easily into your lifestyle.
- It involves less administration than other types of trading.
- You can ‘rollover’ trades.
- Spread betting brokers often offer other products eg. CFDs
- It gives you leverage on your trades, to allow you to access far bigger positions than if you were, say, just trading equities through the normal traditional methods.
This last point is one of the greatest advantages of spread betting and one of the main reasons why I like it so much (other than it being tax free of course!).
Let’s look at an example to see why:
In spread betting you bet in pounds per point.
If you were to buy £10,000 of shares through a traditional stockbroker, you would have to put up the full £10,000.
By contrast, if you did a similar deal through spread betting, you might only have to put up around 10% of the value – this instantly gives you leverage and the potential to access bigger gains. This is because it gives you the ability to purchase larger amounts than would otherwise be possible and frees up your cash for further trades. (But don’t forget this leverage can work against you as well if things don’t go according to plan!)
So What Are The Disadvantages of Spread Betting?
In my opinion, the drawbacks of spread betting are minimal, so long as you sensibly risk manage your trading. What negatives can I come up with?
- There is no ownership of the underlying asset.
- It can be too volatile for some.
- It has defined expiry dates unlike shares e.g. end of the day, end of the quarter.
- There are larger funding costs for longer term trades. However, I would never hold equity positions for a year or so anyway – that’s investing, not trading!
- Losses are unlimited if you don’t trade & risk manage your positions properly – but on the flip side you can rack up big gains faster as well!
- Leverage can lead to large losses.
- It can become addictive and make you over-trade. This is when it becomes gambling rather than trading. If you do this, then you’re probably not cut out to be a trader and don’t have the right psychological make-up to succeed!
How Do Spread Betting Firms Make Their Money?
Contrary to popular belief, spread betting brokers are not out to get you! Unlike other forms of trading, where you would have to pay commission, spread betting brokers make their money on the spread of the price they offer you. For example, the FTSE is trading at 6500. A broker may offer it at 6495:6505 i.e. you can sell at 6495 and buy at 6505. The broker makes the difference between the two.
From that, they could take a view point and hedge the risk out of this position by doing the opposite, or they may fancy a punt and have the opposite view to you and let your position run. They may also decide to trade around it, but this in no way impacts your trade.
Spread betting platforms take a variety of bets in opposite directions – some win and some lose, which often results in a net balance of winners and losers. Your winning position will initially be hedged against losing positions elsewhere across the broker’s client base. The rest can be hedged on the markets to guard them against hefty losses.
Spread betting brokers make their money regardless of whether you win or lose your trade, so there is no advantage to them in trying to make you lose. Quite the opposite, in fact. Spread betting companies tend to prefer successful clients – if you don’t lose all your money, you can continue to trade with them time and time again, resulting in more transactions and more spread commissions for them! For this reason, good spread betting firms will go out of their way to look after their clients and build lasting relationships with them. Mine certainly look after me.
How Do You Choose a Spread Betting Broker?
There are many spread betting brokers out there offering a very similar service. So what should you look for when picking your broker?
- Ensure they are regulated by the FCA (If you are in the UK).
- Look at how competitive they are in relation to their peers. Check the spreads they offer – the lower the better for you! Some specialise in certain markets and offer good prices, but will then offer other markets at much poorer prices, just to have a presence. Do some legwork and check out a few different spread betting firms first.
- Check that the margin / deposit requirement / minimum bet size fits in with your trading fund / pot and what you want to achieve. For example, equities often require 10% margin and if you are a big equities trader, I suggest you’ll need more funds on tap to run your book.
- Is it easy to place a trade – can you get the stops you want, do they offer guaranteed stops, different types of orders etc?
- Is there a good customer service call point – can you talk to real people?
- Do they offer free / good quality charting, research materials etc?
- Is it easy to get your funds in and out?
Which Spread Betting Broker Do I Use?
I personally use ETX Capital for my trading. Why?
- They have a really user-friendly trading platform – it’s very easy and simple to use and gives me everything I need without un-necessary complexity.
- They are very price spread competitive and offer all the markets I need to trade.
- Their customer service is fantastic – always helpful, knowledgeable, flexible and professional. I can easily contact my broker and my queries are always dealt with efficiently. (Very important, as who wants to waste valuable trading time?)
- They are regulated by the FCA and are part of the FSCS compensation scheme. All client deposits are held in a segregated account – so my money is safe!
There are, of course, many other spread betting firms to choose from and I suggest you do your own research before deciding which one is right for you. If you would like any further advice on spread betting, contact us on our UK number 01227 467075 or [email protected].
You Can Start Trading Now!
The Stop Hunter works in partnership with ETX Capital. We use their trading platform to teach on our training courses and if you open a spread betting account with ETX through us, we are able to provide you with a dedicated broker (even if you haven’t attended one of our courses or joined our membership). This service is completely free.
If you would like to learn more about ETX Capital, or wish to open a spread betting account, simply click here: