Often the most rewarding pursuits carry an element of risk. This is certainly true of financial spread betting. If you successfully navigate the risks, then the rewards can be massive. However, you could incur large losses if you fail to prepare a suitable trading plan and associated risk management strategies. Once you have a suitable trading plan, the spread betting broker you choose is highly important.
One of the key traits of a successful trader is being highly attuned to this risk/reward balance. Traders who truly know their edge are aware of the risks involved for them in the markets they trade. So what are the main rewards and risks of financial spread betting?
Rewards
Tax and commission free. In the UK, financial spread betting is exempt from UK Capital Gains Tax and UK Stamp Duty. Subject to your individual circumstances, this means that spread betting has the potential to be cheaper than buying and selling shares.
Access to global markets. Choosing a spread betting broker gives you near-instant access to the international markets. The best providers offer state-of-the-art trading platforms that allow you to trade 1000s of markets from the convenience of your own computer, tablet or mobile phone. A spread bettor can trade anywhere anytime so long as they have an internet connection. You would be hard pushed to get this kind of access when buying shares through a traditional stock broker.
Profit when markets fall as well as rise. You never own the underlying asset when financial spread betting. This means that you can go short on an instrument and profit when prices are falling. When you invest in traditional shares you can only profit when their value is rising. Of course, this also means you may incur losses whichever way the markets move.
24 hour trading. Spread betting with a broker gives you access to the 24 hour forex markets along with 1000s of other instruments.
Margin trading. With margin trading you gain exposure to a far larger part of the market than you would be able to trading the traditional markets. This means that the potential for profits, or losses, is far greater.
Risks
Unlimited losses. As mentioned above, whilst trading on margin greatly increases the potential for large profits, it also massively increases the risk of sizeable losses.
When spread betting, you need to know level of exposure you are taking on in each market and whether this matches your investment objectives.
Risk management tools such as stop losses and guaranteed stop losses are an essential tool to prevent yourself taking too large a hit.
Wide spreads. Financial spread betting brokers make most of their money from the spread cost of each trade that you make. By choosing a provider with tight spreads, you should be able to keep your trading costs down.
Credit offered. Many providers offer credit accounts to their clients. If you decide you would like a credit account, ensure that you know you can afford any repayments.
Margin call. Another risk of trading on margin. This is when a position moves against you and your spread betting provider requires you to deposit additional funds in order to cover all your open positions. Before opening positions it is worth considering the margin you could potentially be exposed to.
Takeaway
Before you begin financial spread betting you need to balance the potential rewards against the considerable risks. To do this you should always trade with suitable risk management tools such as stop loss and guaranteed stop loss orders.
Risk warning: Financial spread bets and CFDs are leveraged products. Losses may exceed deposits.
