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Introduction to financial spread betting

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Introduction to financial spread betting

  1. 1. Introduction to Financial Spread betting By www.madetotrade.net
  2. 2. Risk Warning • Risk Warning: Spread betting & CFD Trading risks substantial financial loss, all transactions are at your own risk. Only speculate on financial spread bets & CFD's within the limits you can afford. Spread betting & CFD's may not be suitable for all. Make sure that you understand the risks involved and seek independent advice to whether it is suitable for you
  3. 3. Origins of Spread betting • Created in the 70's by Investment banker Stuart Wheeler, spread betting really only began to catch on in the late 90's. The continued rise of the internet in Noughties has only fueled the spread betting boom. With spread betting being one of the fastest growing derivative markets. • There are three main reasons for these huge growth of spread betting including the rise of high speed internet, increased market volatility and the potential returns a prudent spread better could in theory make. Spread betting has evolved in order to take in a growing and more diverse market.
  4. 4. What Attracts People to Spread betting? • Say you have £10,000 pounds of savings you want to invest, you will be faced by a multitude of investment opportunities. You might want to put the money into a basic savings product such as cash ISA, or manage a small stock portfolio on your own. You may invest in a fund managed by a fund manager or purchase units in a tracking fund which will track the performance of the market. • But there is one thing that all these options cannot provide you! That is the possible potential returns that a successful spread better can make. Though the risk factor is much greater it can be possible to make consistent returns far greater than any other investment opportunity.
  5. 5. • A type of derivative, spread betting presents the investor with the opportunity to bet on the movements of shares, index's, currency's, commodity's and bonds. It allows you to make returns on the movement of these financial products without physically owning the share or the bond. Spread betting has allowed increased access to the financial markets, the kind which was once limited to the financial big players.
  6. 6. Pro’s of Spread Betting • There are considerable advantages to spread betting. The main ones are featured here. • Simple spread betting is easier to understand than many other financial instruments, including competitors such as CFD. • Small capital requirements accounts can be opened for less than £100, and trades can be made from accounts with balances as low as £28. • Small upfront costs you only pay a small amount of the total costs, usually only 10% upfront, this is known as margin trading. • Make money from both bull and bear markets, giving you the possibility to make money from both rising and falling markets. • Spread bets are tax free, providing you have another source of income. • One account and less paperwork, which makes managing a spread betting account an easier prospect than other types, of financial products. • Extended trading hours, the huge range off markets and options means you can trade 24/7 365 Days a year. • The possibility of unlimited profits and limited losses
  7. 7. Con’s of Spread Betting • Costs when you close the trade, all spread bets have expiry dates unlike traditional share trades, with conventional share trading you only confirm your loss once the shares have been sold. • No dividends or interest, you don't get returns from investments in terms of dividends and interest but you can get the benefit of movements from such events and announcements. • Losses cannot be offset against capital gains, as can be done with traditional forms of share investments. • Due to how spread betting works you can lose more than your initial deposits, which is something which isn't a worry with traditional financial products. • Spread betting is not geared towards long term investments, due to the costs involved in keeping a trade open over multiple.
  8. 8. Spread Betting the Very Basics • We are going to break this down into several steps for you. Step 1: Getting a quote. You ask for a bid-offer quote from a spread betting company. This can be done in several ways, online, telephone, etc. Step 2: If you hold the belief that the value of that commodity (in this example Shares) is going to rise above the offer price which has been offered by the Spread betting company. In this situation you would buy. If you hold the opposite belief to the one above, i.e namely that the commodity (in this example Shares) is going to fall below the bid price offered by the spread betting company, in this situation you would sell Step 3: Pick your stake size, this is the amount you will risk per point movement of the commodity price. For example this can often be as low as 10p. If you place a 10p stake on a Buy - if the share price rises 10 points above the offer price offered by the spread betting company you would have made a £1 profit. Step 4: Inform the spread betting company of the funds you wish to risk and place an reasonable stop-loss position in order to prevent large losses.
  9. 9. Margins and Margin Requirement • The nature of spread betting means that you are not required to cover the full cost of each spread bet up front but instead your required just to have the necessary amount of funds in your account to cover any potential, this commonly known as the Notional Trading Requirement (NTR). It is in this way that your able to achieve significant leveraging through the use of spread bets. • The Notional Trading requirement is calculated in two different ways: As 10% of the value of the potential loss that could be made on a trade. • As a multiple of a pre-determined value known as the bet size factor. • • In this example the required margin for a long bet on Big Bank PLC is 10. The order amount stands at 1 and the price at 100, so the notional trading requirement is 10 as the maximum potential loss that an individual could make on this trade would be 100.
  10. 10. Continued • While your bet is open the bet will enter into either what is known as an open profit or loss position. This is the calculated profit or loss made from a particular bet depending on the movements in the market. While your bet remains in an open profit position, you have no need to worry about margin calls. But this is not the case when you are in an open loss position, the total amount of funds that have to be available from your account increase. If you do not have the required amount of funds in your account what will result is known as a margin call. The spread betting company will contact you. • In order to keep the trade open with the hope that your position will return to a point where you are back in open profit, extra funds will need to be transferred into the account. How the company will treat you and how quickly decisions need to be made on your bet will often depend on how well the company knows you and your history with them. In an ideal world one wants to avoid being forced to close a position by the company.
  11. 11. Is Spread betting for me? • Those who have learnt about the basics of Spread Betting may be interested in the concept and the goal of making money through Spread Betting but are unsure whether the opportunity is for them. Today we are going to examine whether Spread betting presents a good opportunity for you as an individual. • Remember as with all types of trading Spread betting carries significant risk. When it comes to spread betting everyone's first rule should be not to risk what they cannot afford. It should also be noted that not everyone is suited to the stressful and tough world of trading. I personally wouldn't suggest Spread betting to some of the more sensitive souls of this planet. But for the right person a venture into trading could be a very profitable one.
  12. 12. Is Spread Betting for me? Continued • Some even find that trading can be a very addictive activity and every spread better should seriously evaluate what is driving them on to keep up at the activity. A study undertaken by Gambling commission revealed that when it came to financial spread betting 15% of people became addicted when compared to 1% with other forms of gambling. Another study undertaken by London's CASS business school showed that only 1 in 5 people came out as winners. Though it should be remarked that this is no lower than the rates experienced in other forms of casual trading, such as small stockholders and people undertaking share deals. • When stepping into the world of spread betting, the risk you take should proportionate to the knowledge and experience you have of the financial services industry. Lucky spread betting allows be people to be exposed to very limited risks from 1p per point and many sites offer demo and practice accounts which can be opened for free, to allow users to gain real trading experience with no risk. There is also a wealth of resources available for those who wish to learn more and try different techniques.
  13. 13. Is Spread Betting for me? Continued • Be realistic with your expectations. If you have a busy career with much of your day taken up with other commitments, you may want to limit yourself to one open position a day. If you have a lot of free time you may want to monitor and manage more positions at a time. • Spread betting is not just for those who work in City jobs or the financial services industry, a customer survey undertaken by ETX Capital showed that only 8% of their members worked in the financial services sector. Though clearly having a background in financial services may come in very handy for those interested in Spread betting. • Don't enter blindly and take your time to learn, know your limits and Spread betting could become a very rewarding opportunity for you. But you should also be ever vigilant of the risks that you are taking.
  14. 14. Explaining the Spread • The Spread is unsurprisingly one of the key factors in Spread betting. It is also one of the reasons why Spread betting is relatively simple and hassle free. When it comes to trading in physical shares there are lots trading fees and commission that need to be paid (these include stamp duty, capital gains and brokerage fees). By contrast when undertaking a spread bet all the costs are calculated into the spread offered by the spread betting company. All the trader has to take into account is the price movement in relation to the spread on offer. • The Spread is derived from the overall underlying price. This is why Spread betting is a form of derivative trading, as the Spread is derived from the Underlying price. If Big Bank PLC is trading on the Stock Exchange at 100p, a Spread betting company may offer a bid-offer price of 99p-101p for the day. In this case the Spread is 2p. This spread cost is where the spread betting companies make their profit, it is also where all the costs of your trading are covered. How the bid- offer spread is calculated depends on company to company but is often calculated as small percentage of the market price.
  15. 15. Explaining the Spread Continued • How quickly the spread bid-offer changes depends on changes in the underlying market. If Big Bank PLC share prices moves 5p in an hour it is likely that the related Spreads will move by the same amount. When it comes to quarterly futures it is possible that the effect could be even sharper. Many of the Spreads on offer will often radically change due to the levels of volatility in the market, this is especially true when price sensitive information or announcements come to light. • This makes shopping around an attractive proposition while small differences in Spread's appear to not make a huge amount of difference. But getting a good deal on your spread can make all the difference as it can be the difference between a profitable and non profitable bet. Even tiny differences in spread's can make huge differences when the value of the spread bet is particularly large.
  16. 16. Some Basic Spread betting terminology • Market Order- A market order is an order to fulfill an order to buy or sell at the current market price- e.g Buy Big Bank PLC @ 1p per point at 100p would be a market order. • Limit Order- A limit order is an order to sell or buy at a limit price. This limit price is normally to buy or sell above the current market price- e.g Buy Big Bank PLC @ 1p per point at 102p would be a limit order, if Big Bank PLC was currently trading at 100p. • Stop Loss Order- A stop loss order is an order aimed to stop losses at a certain level. With a long client it will be when the market falls to a certain level and with a short client when a market climbs to a certain level. Stop Loss orders are used with an open position in order to provide protection against the market moving against there position. e.g a client placing a Buy order for Big Bank PLC @1p per point @100p, might chose to place a stop order at 94p to limit his loss. • Stop To Open Order- A stop to open order is an order to open a position at certain level, either if the market is falling or rising. These orders are designed to open a position if the market moves in a certain direction, often used by momentum traders who believe to get into a position if the market shows particular significant momentum.-e.g client placing a Sell Order for Big Bank PLC @1p per point @95p, if share was trading at 100p this would be a significant movement.
  17. 17. Some Basic Spread betting terminology • GFD-(Good for the Day) the order is Good For the rest of the trading Day in question. • MOC-(Market on Close) order will be completed at market price at the close of the market. • MOO-(Market on Open) opposite as the order will be completed at market price at the opening of the market. • OCO-(One Cancels the Other) their are two order are two be executed but one cancels the other order. • GTC- (Good Until Cancelled) an ongoing order (different from an Ongoing trade), the order will remain good until it is cancelled by the client. • Fill or Kill- for a particular large order a broker is instructed by the client to get a price for the whole quantity of the order, if he is unable to get a price then the order is killed and cancelled. • VWAP-(Volume Weighted Average Price) an order which is to be fulfilled throughout the day to get the average price of that particular day.
  18. 18. Factors to consider when opening a Spread Betting account? • Margin requirements Types of account on offer. Including whether the firm offers deposit or credit accounts. • The online trading platform on offer, its ease of use and the reliability of the online platform . • The product range on offer, different providers will often offer different products. Looking for the range of products you feel most comfortable with may be very beneficial in the long run. • Telephone trading, does the provider have such a service and the quality of such a service. Even if you plan to trade online, you can never be sure when you may lose your internet connection. • The speed of execution either by phone or online. Faster the execution the better. • Many Spread Betting providers offer educational facilities and practice trading accounts. As a new depositor you may want take advantage of these.
  19. 19. Factors to consider when opening a Spread Betting account? • Do they offer analysis to their clients. Some firms offer fundamental economic analysis to their spread betting clients. • Material they offer for technical charting. Interest paid on cash sitting in your account. Some Spread betting companies offer this to depositors, similar to the type you would get on a normal bank account. The importance of this increases the larger the amount you have deposited. • The range of Stop-Losses they have on offer and the costs involved in having a guaranteed stop loss. Other services that add value. Including how good the service is and other problems or complaints. To learn more visit: www.madetotrade.net/2012/01/beginners- guide-to-strategy-and.html

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