Spread Betting and Strategies to Minimize Risk
Spread betting is a risky trading strategy, and investors can lose more money than the amount of the initial deposit. It is a form of investing that gives access to U.S., European, Asian, and U.K. bonds, commodities, currencies, indices, and stocks. Investors bet that the market will fall or rise and profit if it moves in the desired direction. They lose money if the opposite happens.
Prices vary based on the value of the underlying asset, and the latter is a derivative instrument. Investors do not own shares. They sell or buy share prices in the hope that the price of shares will increase or decrease. The spread is the offer/buy or bid/sell price that companies offer. Points are added to the market value of the asset to calculate its price. In some countries, the profits are free of income and capital gains tax, and no stamp duty is payable.
Example of a Spread Bet and Benefits
If the price of the underlying asset drops to 4,799 – 4,800, the investor will buy at 4,800. He will sell at 5,000 for $5 per point. The profit is (5,000 – 4,800) x $5 = $1,000. If the price increases, however, the trader will lose money.
This strategy offers a number of benefits, and one is that it gives investors access to foreign exchange trading. In theory, the profit potential is limitless. Investors can earn profits even from falling markets. Another advantage is that a single account gives traders access to different markets such as commodities, options, interest rates, and currencies. They can trade a large selection of financial instruments in one currency. Customers can choose from different types of accounts so that they can trade in their currency of choice. This is beneficial in that traders avoid exchange rates and associated costs. What is more, traders don’t pay brokerage fees or direct commissions.
Traders are allowed to make bets on credit and to trade small amounts. Moreover, trading occurs at all times, i.e. when other markets are closed.
The Risks Involved
There are different risks to take into account, including gapping, stop loss, and leverage risk. Gapping occurs when there are significant price fluctuations. This can happen for a number of reasons, including natural disasters, political instability, business restructurings, the state of the economy, and others. Traders can use guaranteed stop orders in this case. They can choose a stop level to minimize losses. Non refundable charges apply even if the trader cancels the stop order. Traders can also change the level of stop loss provided that they have enough money in the account. Finally, investors also face leverage risk. Even small price fluctuations may result in a significant loss that exceeds the original investment. Monitoring open positions helps traders to minimize risk, especially if they haven’t attached a stop loss. Active monitoring helps avoid losses due to extreme price fluctuations and market volatility. In some cases, traders choose to convert an open bet to a controlled-risk one. They pay a premium for this, which is added to the opening price. The position will close at the sell or buy price. If a bet is rolled over, a stop is placed on the bet. The advantage of using this strategy is that traders don’t have to move and monitor their stops all the time. They can use stop orders on short and long trades, which helps to prevent losses when the market moves. Traders should only specify the step size and stop distance.
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