If you spend any time at all on financial blogs, you’ve no doubt seen mention of spread betting. If you’ve never taken part yourself, you probably don’t know what it is. Even if you have experience in other types of investment, you may have questions about what spread betting is or how it works in practice. Before we get into any details, spread betting is different than traditional investments in many ways, but herein lie many of its advantages. If you know what you’re doing, there is no faster way to see a return on an investment. Here’s how it all works.
With traditional investments, the investor is always buying something. That something might be a piece of a company, a building, a hunk of gold, or many other things. What is spread betting? Glad you asked. In spread betting, you don’t actually own anything. A spread betting broker will show you perhaps hundreds of different financial goods (like currencies, precious metals, index funds, and other stuff like that), as well as their real time value changes. The spread betting investor is then posed a question: How do you think the price is going to change?
At the point in time when the bet is committed to, the price of the financial entity is at a certain point. Just above and just below that point are two other values: the buy and sell prices. The distance between these two points is called “The Spread”. Let’s say our investor has made a bet on the price of Apple stock. He chose to have his bet wrap up in exactly 24 hours. He decided that he thought the price of that stock would rise. If at the end of 24 hours the price has actually risen, and it has crossed the upper threshold of the spread, then the investor will receive dividends. The dividends are totaled in proportion to how much the price actually rose, so the sky is the limit.
The same is true if the investor thought the price would drop, and it actually did after 24 hours. The amount of value the Apple stock lost, beneath the value of the lower spread, would give the investor earnings. Losses are tabulated the same way, though there are ways to prevent the investor from losing his or her pants. Let’s say you thought the Apple stock would rise but it actually fell, ending up lower than the sell price (low side of the spread) when time ran out. If the price fell a lot, you might have to pay back a ton of money, but that’s why Stops are around.
Stops are various kinds of options that a spread better can put on his or her bets. The stop cuts the investor’s losses at a certain point, just in case the price was going to keep going in the “wrong” direction and sealing in a lot of payments imposed on the investor.
With this knowledge, you could probably open a spread betting account today and do pretty well. It’s good to open up trial accounts with trusted brokers like the one linked above, so you can get the experience you need to really excel at this exciting investment form. If you’re willing to learn a new platform and about the way prices fluctuate in the real world, you could do very well.