Compared to many struggling industries these days, the high flying world of finance looks far more appealing than many of its alternatives when it comes to making a great living. It’s not hard to see why: when you work in a sector of the economy that handles the very thing you crave the most, you study your tail off on the nuances of the art of making money.
It may not be an easy path, but those that commit themselves diligently to this task and work hard are often handsomely rewarded for their efforts. Inspired by the countless stories that you have heard of ordinary people making sacks of cash day trading out of their own home, you have decided to take the plunge.
Having read up on a number of topics and strategies surrounding trading, you have recently decided master the art of spread betting stocks. However, before proceeding any further, it is vital that you learn the basics surrounding this vehicle of profit, lest you lose your shirt in record time.
In the paragraphs that follow, you’ll exactly what spread betting is, how one goes about making a tidy sum from a few astute picks per day, and why spread betting is superior to many other investment strategies. Let’s do this!
What do we mean by spread betting exactly?
First, let’s break down this term into its parts, so that you may fully understand what is meant by this term, and its implications on the investments that you will be making. The betting part of spread betting refers to you taking a position on whether a price of a share in a company will rise or fall over a given period of time. The spread part of spread betting refers to the gap between the buy and sell price of a stock (e.g. Barclays buy/sell price as of this writing was 222.20/222.05).
Taken together, spread betting simply means you bet on either the buy price to go up, or the sell price to fall. Ideally, the tighter the spread the better, as it means that you will be in profit quicker when the market moves in your favor.
How does the spread betting process work?
When you spread bet, you are NOT buying a stock, you are merely wagering on the outcome of a stock’s movements over time. As such, don’t come into this corner of the financial world with a Buffet-esque buy and hold mentality … we aren’t purchasing assets here.
Further, you won’t be putting up the full value of the position of a bet, as spread betting is frequently leveraged through other people’s money. This is awesome and scary at the same time, as you stand to make a ton of cash for your stake in a position (often around 5 – 10%) when you’re right, but when you’re wrong, you’re on the hook for a lot more cash then you wagered.
For example, if you bet $5 a point that Barclays will go up, and the margin rate for it is 10%, your total position will be $55.50, based on the formula (5% x ($5 x 222)). If Barclays closes next week at 242, you will have made $100 on your money (20 point gain x your $5 stake). If it drops though to 202, you will owe $100, so be sure you can handle the risk involved in this game before playing.
So why should I spread bet?
There are numerous advantages to spread betting over other investment techniques. Unlike other alternatives, you have the ability to short stocks rather than buy them and hope for the best. In the UK, your gains from these activities are effectively tax-free.
If you don’t have the big bucks to bet on a big company like Apple or Berkshire Hathaway, it’s not a problem, as you can buy small pieces of a trade, as spread betting allows you to leverage other people’s money.
Best of all, you can check into your home office any time of the day or night, or log in from any corner of the world wherever there’s an internet connection … goodbye 9-5!