Spread Trading Explained

Financial spread trading, or spread betting, is a method of trading which is much more exciting than traditional investing, although it can be somewhat confusing to first-time investors. Put simply, investors use financial spread trading to bet on the direction a stock or financial instrument is likely to go in.

Although this may sound similar to traditional trading, it is not. Financial spread betting is traded ‘off-exchange’, thereby making it very easy for novice and ‘small-time’ investors to take part in. Spread trading tax laws are also more relaxed than those which govern traditional trading, with no stamp duty to pay on transactions and no tax applicable to capital gains profits. As a consequently, the bid spread is often much wider, as the potential for profit is considerably higher (along with the risk).

One of the great benefits of spread betting is that it allows investors to take margin positions. This means that investors do not pay the full trade price and yet can control a position considerably greater than their initial deposit amount. With some deposits for some large company shares starting as low as 5%, this can naturally provide considerable leverage. Spread betting also allows investors to profit from falling markets by shorting companies when their share falls. Short selling has become very topical as investors rush to take advantage of the market dips associated with the recent economic climate.

Although it is possible to make a healthy profit with financial spread trading, it is not a means to get rich quick. Investors need to make themselves aware of the risks involved in order to avoid running up big losses. Some famous traders have crumbled and fallen by the wayside simply because they didn’t fully appreciate the risks involved. Use your head and never trade on hope.

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