Spread betting is a tax-free, easily accessible and exciting way to trade on the markets, however it carries financial risks that go beyond the sum of your deposit(s). FortuneSpreads recommends that you read this guide and others in order to fully understand the possible negative implications of spread betting.
What is the risk?
By opening a position in spread betting you are exposing yourself to risks that go beyond the sum of the money wagered. Spread betting is unlike traditional trading or wagering in that it is a leveraged product; when you make a spread bet, you are often betting a lot less than the underlying value of the product. This means that to make up the difference between your investment and the actual asset price, you must effectively borrow money (leverage). Because your position is leveraged, your losses are not limited to the balance in your account and it is possible to go into debt when spread betting. If you close a position in losses then you are obliged to pay back those losses.
How to avoid the risks of spread betting
To a new spread bettor, the above may sound particularly unnerving; however there are tools that allow you to manage the risks of spread betting without exposing yourself to any potential debt.
A stop loss is a limit to what you are willing to lose. When you open a position, you will be asked if you would like to place a stop/loss. For example, if you bought the FTSE100 at 5660.90, any decrease in its value would lead to losses on your position. A stop loss can be applied to limit yourself to a decrease of your choosing. Your stop loss could be set at 10 points below the price at which you bought (5660.80) – this means that if the index reached 5660.80 then your position would automatically close and your losses limited. Stop losses work the same when selling a market. For any new trader, being able to apply a stop loss to your position is absolutely essential. Most spread betting platforms will allow you to set these stop/losses manually, while some have options for automatic stop losses. By using a stop loss, you are able to control your losses without exposing yourself to any additional risk or debt.
It is always important to monitor your open positions regardless of stop losses. New traders may find that they have entered a stop loss incorrectly or have not set one at all; being able to identify any issues in real time will guarantee that you’re not caught out. Experienced traders often use stop losses to protect against catastrophic losses caused by market shocks. If you set a stop loss that is too close to your initial buy or sell price, then you may find that your positions are closed because of small short term swings in the market. Opening and closing positions unnecessarily can result in losses from the spread.
Third Party Advice
Like with all investments, it is important that you receive unbiased third party advice. Spread betting can be an incredibly exciting and lucrative career, however it can also lead to addiction. Betting within your means and setting stop losses that guarantee your financial security are important; seeking financial advice will help you to decide on what is best for you.