Financial Spread Betting: The Glass Half Full Version
There’s been a great deal of negativity about financial spread betting over the years. It’s a trading activity that is surrounded by many myths and rumours and supposed pitfalls that have been blown out of all proportion. Many consider spread betting to be just too complicated or don’t fully understand it. There is a persistent belief that investors very rarely win at financial spread betting, but if that were the case, nobody would do it and the professional City traders with the major institutions are no mugs!
Like any punt, there are winners and losers otherwise the whole concept couldn’t work. Current estimates suggest that almost 90% of those that try out the financial spread betting market lose their deposits or close their accounts within the first three months. Obviously, the other 10% who do win are making their money out of the 90% who lose and while that sounds very cut throat the simple fact is that even winners will have losing trades from time to time.
The other common misconception about spread betting is that it’s all about Futures and Options. It’s true that there are some similarities with Futures or Options contracts as well as an investment vehicle called Contracts for Difference (cfds), but spread betting is a very different animal under the skin. In order to invest or trade in Futures and Options directly, you need a great deal of money and know your market extremely well, whereas spread betting demands a high degree of prudent judgment but less in depth, intimate market knowledge. Financial spread betting prices are usually linked to that of the Futures and Options market for a particular stock or set of indices, so in effect spread betting allows you access the potential profitability of Futures and Options without the need for the huge amount of ready cash required to trade.
What may have been true once was that you needed to be relatively wealthy to consider spread betting. Nowadays you can open an account with as little as a £100. While that isn’t going to break the bank, trading that amount will also never make you rich, no matter how well your trades go! What dipping your toe in the water with that modest amount will do however is allow you to learn how to trade. Once you have proved to yourself that you can make regular profitable trades and have a feel for how the whole thing works without the fear of losing your shirt, then you can begin to trade with larger sums.
So if it’s that easy why isn’t everyone doing it? Quite a few people are: in excess of 50,000 in the UK it’s reckoned. Many start out by using a “virtual trading account” to prove to themselves that they can successfully manage spread betting and then move to a small margin with one of the financial spread betting companies. The scale of success in spread betting depends on many factors, but one of the more significant is your attitude to having winning and losing trades. Regarding spread betting as a regular investment vehicle will always disappoint. It is a gamble after all (which is why it’s tax exempt) albeit one based on your own judgment, knowledge and skill and you will have your fair share of victories and defeats. As with any other form of punt, never gamble more than you can afford to lose, or if you do, be prepared to accept the consequences – good or bad.
the Author, Kat Cole, admits that so far her forays into spread betting haven’t exceeded the £100 mark!