For a long time now, the financial market is, and still remains a means for hypothetical profits. One way through which speculators seek to make enormous profits within a short period in the financial market is Financial Spread Betting. The cons of speculations are that they mostly end up in risks.
Unlike old-fashioned investing, Financial Spread Betting is one way of betting, though it is not dependent on the outcome of a particular event. You can minimize the losses by closing the bet and withdrawing the profits any time. This product is a margined derivative where you place a bet on the price changes in both CMC Markets and products like currencies, indices, bonds and stocks. The market movements guide you on how to invest appropriately.
The importance of a spread in Financial Spread Betting
A brokerage firm quotes different buying and selling prices. The buying price for a stock is called the bid price, whereas the selling price for a stock is the asking price. A spread is therefore the difference between the two prices; it is the charge paid to the broker.
Placing a bet on a financial spread
There is no limit on the amount that an investor can bet on a financial security. You can start with £10 per point. If you feel that the FTSE is likely to increase, any bet that you place translates to a profit or loss of £10. An increase of 20 points therefore, translates to 20-point movement in your favor and a profit of £200. For both the market price and investor to benefit, the market must move away from the asking or bid price based on the predicted direction.
Pros and cons of financial spread betting
This form of betting comes with benefits as well as risks. Benefits include access to wide range of markets, minimal barriers to entry, freedom to take either long or short positions, and tax-free profits in some jurisdictions. It is lucrative because one can make massive profits with little investment. The margin requirements for some currency pairs and indices may be lower, and there are no commissions to be paid. Betting is not treated as an investment; hence its profits are not subject to stamp duty or capital gains taxes. There are some instances where profits are not taxed if the investor does not solely draw his/her livelihood from this practice.
Financial Spread Betting Strategies
Strategies are very crucial when betting or investing as they cushion you from making more losses. Likewise, before engaging in financial spread betting, it is imperative to observe the market trends and adopt a befitting strategy. The most common strategies include range trading, news trading, breakout trading and trend trading.
This is the most common strategy employed by traders, especially those who are new in the game. It entails studying the momentum of the security to predict its trend as well as the entry optimal points. Higher highs and higher lows on charts are indicative of an upward trend in prices. Most traders thus assume a position. In contrast, lower highs and lower lows indicate downward trends and a short position are assumed by most traders.
Identifying areas with over-extended or reversible trends is part of the strategy in contrarian trading. It requires one to assume a short position when a resistance level is reached and an upward trend starts reversing, and assuming a long position a support level is reached and a downward trend starts reversing.
Here, both the support and resistance levels are identified and long and short positions taken respectively. This strategy is best suited for new traders. This makes it easier to place stop-loss orders above support or resistance levels.
Unlike other strategies, this one does not depend on technical analysis. It relies on the interpretation of news and financial results, economic policy, macro-economic data and other releases. One stands to make enormous profits since the data releases and other headlines influence the price activity.
This strategy hinges on the expectation that prices will extend higher or lower if the trends are upwards or downwards. It is an alternative to the other strategies mentioned above.