If you’ve never come across the words ‘spread betting’ in a financial sense, you would probably be forgiven for thinking that it has something to do with bookies and sporting events.
So what exactly does it entail?
In essence spread betting is a fairly simple concept. It merely entails placing a bet on which way you think a particular market is going to go. If you think the market is going to rise and you have bet on it going up (going long), then when it does you make a profit. If on the other hand you predict that the market is going to fall and you bet on that exact scenario (going short) and it does, then again,you make a profit. When you close your bet you can claim your profit.
Let’s put this into a proper scenario…
Okay let’s say that we bet on the NASDAQ and based on some recent news we think that it may go up, so we place a ‘long’ bid. If the index does exactly what we want it to do and rises, then we are in profit. How much profit depends on the spread. For example, say that the index started off life at 100 and it rises to 200. If we close the bet at this point then the spread would be 100. Therefore if we placed a £1.00 bet then we would have made a healthy profit of £100.
Obviously it isn’t all cut and dried and there are definite risks involved in spread betting. For example if you got it horribly wrong and instead of the stocks going up by 100 points, they went down by the same margin, then you would then be ‘in the hole’ for £100. This can be prevented by placing a stop order should the stocks start to fall beyond a certain point, however it doesn’t eliminate the risk altogether. The potential is there to incur heavy losses if you are not careful.
So how easy is a spread betting account to set up?
In essence, setting up a spread betting account online is a fairly simple process. Many of the trading platforms offer spread betting online and will also have demo platforms for you to practice. This is where many people look to dip their toes in the water and it’s worthwhile checking out the brokers product spec before opening up a pro spread betting account. Download a practise demo version – it’s an ideal starting place if you are looking to learn how to make money out of the stock markets.
Like anything it pays to do your research first before you jump in with both feet as success certainly isn’t guaranteed. If you are happy to go ahead and have the funds to do so then spread betting is a great way to earn some extra cash, provided that you understand what you’re doing.