The market of financial instruments includes a lot of traditional investing opportunities, through which a person can potentially make profits – buying stocks, bonds, commodities and speculating on exchange rates.
However, there is another way that some investors prefer, but it is just as risky as other so-called quick ways to make money. We are talking about financial spread betting. However, you must first understand how it works before risking your money.
Spread types
There are two types of spreads in the market:
- floating;
- fixed.
A floating spread is affected by various situations, and its size may change at any moment. These fluctuations look spontaneous, but they are regulated by market makers, who are responsible for maintaining market liquidity and ensuring the relative stability of the spread.
The process looks like this. The broker sets the lower limit of the spread. Further, the indicator may change in the direction of growth as a result of fluctuations in asset prices.
A fixed spread has a strictly fixed size. It does not depend on the influence of currency fluctuations, and supply and demand indicators. The fixed spread allows you to predict price changes and calculate the approximate amount of profit from a transaction. Sometimes it is increased manually by the broker, depending on the current forecasts in the field of investment, finance, or economy.
A fixed spread is negotiated in advance and reflected in the terms of the contract between the broker and the trader.
The floating spread is used the most widely. Under the influence of emergencies, it can reach 50 points or more. During periods when the market is in a calm state, the average spread varies in the range of 2-5 points.
What does affect the spread size?
The spread size depends on the four following factors:
- Asset liquidity. It is the most important indicator that affects the spread. The higher the liquidity of an investment instrument, the lower the spread value. The lowest liquidity is the night period and weekends. It is at this time that the range of price boundaries expands.
- Transaction amount. Too insignificant or, on the contrary, too high the cost of the contract is associated with additional brokerage costs. It entails an increase in the spread.
- The current situation in the stock market. It depends on the political and economic factors of individual countries and the world community. Any change in these areas entails currency exchange rate fluctuations and an increase in the spread.
- Availability of affiliate programs. Usually, their participants are rewarded at the expense of the spread.
All this should be taken into account and constantly analyzed for an overall understanding of the situation in the market.
Spread options
During the trading period, the trader is provided with information on prices in the form of a table. It is the so-called “glass”. The cost of assets is indicated, taking into account the applications of sellers and buyers.
Each lot has a set step – the minimum price difference, depending on the selected currency. The spread of liquid assets, as a rule, is as close as possible to the step, while illiquid assets are overestimated.
There are bonds on the market, concerning which you can set the sale price, but at the same time, you can not find the purchase price. In this case, if the asset is reliable enough, you can add your own level of its purchase price to the “glass” and wait for the order to be executed.
Tracking and accounting for the spread allows you to determine the expected profit from the transaction. It also helps to assess the volatility of assets and make a forecast of the most profitable rates.
Spread betting tips
Spread betting is a leveraged derivative product. These financial products, commonly used for speculation, offer features similar to futures contracts and contracts for differences (CFDs). Spread betting on stocks, for example, involves speculating on price changes in the stock market. Creating a well-defined trading system with money management rules may be the best approach to spread betting on stocks.
An investor can trade the price movements of stocks, commodities, currencies, stock indices, and bonds without taking ownership of any assets. Extended rate stocks will allow an investor to trade individual stocks or indices with highly leveraged derivative contracts. A high degree of leverage can lead to a very high risk/reward ratio. Exposure to risk in highly leveraged contracts can lead to huge losses, high margin requirements, and a complete loss of investment funds.
Profits made from spread bets are usually tax-free, but the trader should check the tax laws in each particular country. Note that tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.
One of the differences between gambling and trading is the system in use. Trading systems have certain signals that provide entry and exit points for trading. These signals are usually found in the process of fundamental and technical analysis. A good capital management plan is an important element in a trading system.
Spread bet contracts are time-dependent. Be aware of all charges associated with holding positions for extended periods. Purchase and sale prices of spreads are similar to those of other markets, but brokerage fees and commissions are included.
Risk management is the most important aspect of betting distribution. The investor can lose more than the initial investment. The investor must use the risk management tools provided by the broker, such as stop loss and trailing stop. It is necessary to conduct a complete analysis of the market in which trading is carried out. The maximum risk should be taken into account in each trade, with an emphasis on the maximum loss.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.
