Spread trading also known as spread betting involves trading a derivative which allows a trader to take a position on a given asset/market on whether its price will go up or down. This is done without having to buy the actual underlying asset and enables you as a trader to go Long (Buy) or go Short (Sell) any given market depending on your analysis of the market or your trading strategy. There are thousands of markets which traders can participate in through spread trading.
Spread trading is a leveraged product which means when you take a position in the market you only pay a small percentage of the full value of the position taken.
This small percentage is called margin and varies across different markets depending on the factors such as trading volume and the volatility of the underlying asset. There are no further commissions to be paid in spread trading as this is already factored in the Buy and Sell prices of the asset being traded.
The difference between the Buy and Sell price of an asset or any market provides the broker with their commission and is known as the Spread.
Spread trading is tax free in the UK but in other countries it is very important to check with your tax advisor or relevant authorities. Spread trading can be useful for traders looking to enjoy the tax free benefit as well traders and investors looking to diversify as well as manage risk within their investment portfolios.
Below is an example of a Spread Trade which is done at value per point of price movement:
The market price for the EUR/USD Forex pair is as follows
Sell: 11, 181.1 Buy: 11, 181.7
The Spread in this example is 11, 181.7 – 11, 181.1 = 0.6
If your analysis tells you that the EUR/USD is going to go up and you want to Buy at £5 per point:
The market goes up and you want to Sell @ Sell 11, 391.1 Buy: 11, 391.7
It is important to note that trading can result in losses as well and it is important to manage your risk in the event that the market moves against your position.
In this example if the market had fallen by 200 points, the trade would have resulted in a loss. The Sell price would have resulting in a Loss of £1000.
Disclaimer – Futures, CFD, Margined Foreign Exchange trading, Warrants, Options and Spread Betting all carry a high level of risk to your capital. Only speculate with money you can afford to lose. Futures, CFD, Margined Foreign Exchange trading and Spread Betting may not be suitable for all customers, therefore ensure you fully understand the risks involved and seek independent financial advice if necessary.
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