Learn how to start trading shares with financial spread betting in this no-nonsense beginner’s guide. Make a profit even if the price of shares fall, but with the extra reward comes extra risk.
Minute 1: what is spread betting and how you can make money spread betting
Spread betting allows you to bet on whether the price of a share or index such as the FTSE 100 will rise or fall and make a profit if you have bet on the right outcome. You ‘go long’ (buy) if you think whatever instrument you are betting on will rise and ‘go short’ (sell) if you think it will fall. This is different to investing where you only profit if a price rises.
You make money by successfully placing a ‘bet’ on a pounds per point basis – your pounds increase by the corresponding points movement. Spread betting has a number of benefits in addition to be able to profit from positive and negative movements – including no stamp duty to pay, no capital gains tax and you can make great returns on little outlay due to trading on margin.
Minute 2: trading on margin and understanding the RISKS of spread betting
When you visit a spread betting provider’s website, it will usually say something like 70%+ of retail accounts lose money with this provider. It is more risky than investing. One of the key concepts to understand is that of trading on margin.
When you spread bet, you will only put down capital equivalent to the % of the total value of a trade – for example you will only put down 10% trade and are essentially borrowing the rest. This is great if your bet is successful – because your profits are amplified and give a solid return based on little outlay.
BUT if your bet or position moves against you, you will lost more than your initial outlay – this is a key difference between investing and trading. Thankfully, just like with investing, you can also make use of stop losses when spread betting. Likewise, there are techniques you can use such as position sizing to avoid blowing all your capital – placing trades with 1% of your designated capital is seen as good practice, especially for newcomers.
Minute 3: identifying what you will spread bet on and develop a trading plan
You can spread bet on just about anything – but we are focusing on shares and indexes. So you can trade on UK-listed shares as well as US-listed shares (without the hassle of FX transactions). But bear in mind that some of the indexes will be called slightly different things – the FTSE 100 the UK 100 and Nasdaq Composite the Tech 100.
It makes sense to spread bet on what you know well. Don’t take punts. The more informed you are, the more likely you are not to be one of those 70+% that lose money when spread betting. This could be a particular group of shares, a sector or index.
It’s important you also make a trading plan – outlying why you are trading, have some measurable goals and develop a trading diary that you can learn from. This is much like understanding your risk tolerance and ambitions when investing too.
Minute 4: using fundamental and technical analysis
You will most likely be familiar with fundamental analysis if you are already invested in shares. Looking at a company’s earnings, understanding its strengths, viewing brokers reports and utilising various ratios such as the P/E Ratio to understand if a share price is under or overvalued (providing a buy or sell signal).
Other data to look out for including that related to the economy – even that coming from the US due its dominance in business and setting the tone of commerce around the world.
Although, spread betting and trading is more closely associated with technical analysis – this makes heavy use of interpreting charts and patterns to support short and long decisions.
Some of the most commonly used are moving averages to smooth out the noise from share price fluctuations, support and resistance (identifying where a price tends not to fall or go beyond) as well as a ‘golden cross’ to see if a share price is breaking new ground and crossing a defined moving average (usually 200 days).
Minute 5: Choosing a trading style and choosing a spread betting platform
There are a range of trading styles or strategies you can use when trading – reflective of the duration you open and close your positions. For example, position trading could mean opening and closing your position in months or years, day trading on or within the same day and scalp trading within minutes or seconds.
There are many spread betting platforms out there and they tend to make their money primarily within the ‘spread’ – similar to investing and market makers making money based on the bid-offer price (the difference between you buy and sell at). Tight spreads are therefore an important consideration.
Other things to look out for are online training resources, margin requirements (the bigger ones tend to require you to put down less) and perhaps most importantly – the platform itself. You need to be comfortable with the user interface as you will be looking at it quite frequently.
Always give demo accounts a try before committing – not only to enhance your understanding of how spread betting works but whether the provider feels right for you.
And remember – you will lose money spread betting as not every trade will be a winner. The key is to successfully manage or cut your losses and be in a position where overall you are achieving your profit goals. Don’t make rash decisions and use your trading plan and diary to keep you in check!
You can also view our full A-Z on learning how to trade shares with financial spread betting here.