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X FACTOR BETTING ODDS AMERICA
Key characteristics of spread betting include the use of leverage, the ability to go both long and short, the wide variety of markets available, and tax benefits. Key Takeaways Spread betting allows traders to bet on the direction of a financial market without actually owning the underlying security. Spread betting is sometimes promoted as a tax-free, commission-free activity that allows investors to speculate in both bull and bear markets, but this remains banned in the U.
Like stock trades, spread bet risks can be mitigated using stop loss and take profit orders. Origins of Spread Betting If spread betting sounds like something you might do in a sports bar, you're not far off. Charles K. McNeil, a mathematics teacher who became a securities analyst—and later a bookmaker—in Chicago during the s has been widely credited with inventing the spread-betting concept.
But its origins as an activity for professional financial-industry traders happened roughly 30 years later, on the other side of the Atlantic. At the time, the gold market was prohibitively difficult to participate in for many, and spread betting provided an easier way to speculate on it. Despite its American roots, spread betting is illegal in the United States.
A Stock Market Trade Versus a Spread Bet Let's use a practical example to illustrate the pros and cons of this derivative market and the mechanics of placing a bet. First, we'll take an example in the stock market, and then we'll look at an equivalent spread bet. Note here several important points.
Also, normally commissions would be charged to enter and exit the stock market trade. Finally, the profit may be subject to capital gains tax and stamp duty. Now, let's look at a comparable spread bet. In making this spread bet, the next step is to decide what amount to commit per "point," the variable that reflects the price move.
The value of a point can vary. In this case, we will assume that one point equals a one pence change, up or down, in the Vodaphone share price. In the U. However, while spread bettors do not pay commissions, they may suffer from the bid-offer spread, which may be substantially wider than the spread in other markets.
Keep in mind also that the bettor has to overcome the spread just to break even on a trade. Generally, the more popular the security traded, the tighter the spread, lowering the entry cost. In addition to the absence of commissions and taxes, the other major benefit of spread betting is that the required capital outlay is dramatically lower.
The use of leverage works both ways, of course, and herein lies the danger of spread betting. As the market moves in your favor, higher returns will be realized; on the other hand, as the market moves against you, you will incur greater losses. While you can quickly make a large amount of money on a relatively small deposit, you can lose it just as fast.
If the price of Vodaphone fell in the above example, the bettor may eventually have been asked to increase the deposit or even have had the position closed out automatically. In such a situation, stock market traders have the advantage of being able to wait out a down move in the market, if they still believe the price is eventually heading higher. Managing Risk in Spread Betting Despite the risk that comes with the use of high leverage, spread betting offers effective tools to limit losses.
Standard stop-loss orders: Stop-loss orders reduce risk by automatically closing out a losing trade once a market passes a set price level. The manner in which they behave and respond to certain changes provides the volatility necessary for financial spread trading to succeed, and by understanding their inner workings, traders can come a couple of steps closer to realising their potential. Similarly, orders remain the core tools of spread bettors, implementing their instructions and delivering the flexibility necessary to guard against unwarranted risks and execute automatic trading decisions conditional on market behaviours.
By understanding the way in which markets and orders interact, and the specifics of each order type, we can start to build up a picture of how the tools of the trade can be used to protect capital, maximise profits and lower the risk profile on this otherwise highly risky trading style. Financial spread betting can be an exciting, fast-moving form of trading, and allows ordinary people from all walks of life to access the markets with very low barriers to entry. That said, the markets take no prisoners, and only by being proactive in your research, planning and strategy efforts can you give yourself the best shot at generating a consistent, aggregate profit from your trading activity.
Making a Spread Bet When making a financial spread bet, a trader will decide on a certain amount of money to risk. With any type of financial trade, you have to pay in order to play. Because the cost of the spread is factored into any trade, the broker is always at an advantage.
Because the ask price is always above the current market price and the bid price is always below, traders have to pay the difference before they even enter the market. The current spread is based on a number of factors, including the current spot or futures rate, current market liquidity, the bet size, and spreads quoted by competing brokers.
At the end of the day, the size of the spread is set by the company you choose to trade with. While the house always makes money, it makes sense to research first in order to find a competitive broker with low spreads. Simplified Spread Betting Example To offer a more detailed example, if the FTSE stands at , the provider may offer you a bid price of and an offer price of However, you pay the spread whether you win or lose, an important point that all traders should never forget.
Typically around a few percent of the value of the underlying asset margin can be much lower on popular markets , the margin is used by brokers as a way to ensure there is no risk of real loss. However, waiting for a margin call is a very bad way to trade, with most people setting up stop loss orders to close out trades at specific levels.
Orders and Execution Normal orders are not percent safe, however, especially when the market is moving so fast that lots of orders are triggered at the same time. Luckily, a number of companies offer guaranteed stop loss orders, where traders pay either a slightly higher spread or an extra fee as a way to insure themselves during times of high volatility.
Stop loss orders are just as important as take profit orders, and the ratio between them is a significant part of all successful trading systems. The following illustration of spread betting pricing explains the basics of how spread betting transactions work. The FTSE opens at Amidst increasingly positive economic indicators and a number of key announcements pending, you conclude that the FTSE will rise on the day, and want to enter into the spread market for it.
At the point where the FTSE sits at , your broker may quote pricing at What does this mean? The prices given reflect the buy and sell prices of the market. This essentially means you are betting that the market will rise beyond , at which point you can start to earn multiples of your stake.
This means you start earning multiples of your stake when the market falls below
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