While it may seem tricky when you first have a look at financial spread betting, once you gain a little experience it becomes really easy to get to grips with. As we will talk about later, there are many different markets that you can trade using financial spread betting and once you learn the basics in one, the others become easy to master too.
Little capital required to get started
The great thing about financial spread betting is that you don’t need a lot of capital to get started. You can start with a couple of hundred quid and the reason for this is leverage (which I will come back to) plus you don’t have to pay a fixed commission on each trade.
The financial spread betting brokers make their money in the spread of the trade. And the spread is the same size no matter how large the trade.
I found that when I was trading shares that you need to trade in sizes of a couple of thousand pounds in order to minimize the impact of the commission. My share trading account charges around £12 per trade. Now if I just bought a thousand pounds worth of shares, the shares would have to go up 2.4% (because you pay to buy and sell) in order to break even (excluding stamp duty).
Financial spread betting has become a more competitive market over recent years so financial spread betting companies have actually had to start offering more value to attract clients. As a result you no can trade from as low as 50 pence per trade.
Lots of markets to get your teeth into
Financial spread betting is a great way to expose yourself to a vast number of different markets. You can do all this from a single financial spread betting account.
Here are some of the different markets you can trade… Individual stocks (both domestic and foreign), indices, currencies, commodities, interest rates, bonds and house prices. I have some strong views about house prices and I will be showing you how I will be using financial spread betting to try and profit from changes in house prices.
Going short
As we know, markets don’t go up all the time. With financial spread betting one strategy is trade in the direction of the market. If the market is going down then you don’t want to be long. But you also don’t want to not have a position as you will be losing out on potential profits.
This shorting that financial spread betting allows means you can hedge your positions. Say if you have a large stock holding in a company and you had bearish feelings about it in the short run but didn’t want to sell, may be it is in profit and I didn’t want to incur capital gains tax, you could open a short position using Financial Spread Betting and hope to make some profit in the short term.
No Tax
Current rules relating to financial spread betting mean that you don’t have to pay tax, neither capital gains or stamp duty. Now this was true at the time of writing this so always check with your local tax office to ensure that that you comply with the financial spread betting tax laws.
Reducing currency risk
I like to buy stocks in the US. Now because I buy in dollars my profits will be affected by the relationship between sterling and dollar. Now at the moment I am quite negative about the pound and have done well from stocks increasing and the dollar increasing at the same time. There are other situations where I don’t want the double exposure. Imagine there was a currency worse than Sterling (do your best to imagine!). I would be reluctant to buy shares in that currency because even if the shares did well, the currency devaluation may give all my profits back.
Leverage
One of the great advantages of financial spread betting is leverage, and often markets have margin requirements of only 3%. Now I will be going into how this works in a later post mainly covering the risks of financial spread betting. But just to give you flavour now, leverage allows you to exaggerate you profit as well as your losses. It is essential that you fully understand the concept of leverage and how it will affect your trades. Don’t get me wrong, leverage is good but only when you fully understand and you have taken all the necessary precautions.
Little capital required to get started
The great thing about financial spread betting is that you don’t need a lot of capital to get started. You can start with a couple of hundred quid and the reason for this is leverage (which I will come back to) plus you don’t have to pay a fixed commission on each trade.
The financial spread betting brokers make their money in the spread of the trade. And the spread is the same size no matter how large the trade.
I found that when I was trading shares that you need to trade in sizes of a couple of thousand pounds in order to minimize the impact of the commission. My share trading account charges around £12 per trade. Now if I just bought a thousand pounds worth of shares, the shares would have to go up 2.4% (because you pay to buy and sell) in order to break even (excluding stamp duty).
Financial spread betting has become a more competitive market over recent years so financial spread betting companies have actually had to start offering more value to attract clients. As a result you no can trade from as low as 50 pence per trade.
Lots of markets to get your teeth into
Financial spread betting is a great way to expose yourself to a vast number of different markets. You can do all this from a single financial spread betting account.
Here are some of the different markets you can trade… Individual stocks (both domestic and foreign), indices, currencies, commodities, interest rates, bonds and house prices. I have some strong views about house prices and I will be showing you how I will be using financial spread betting to try and profit from changes in house prices.
Going short
As we know, markets don’t go up all the time. With financial spread betting one strategy is trade in the direction of the market. If the market is going down then you don’t want to be long. But you also don’t want to not have a position as you will be losing out on potential profits.
This shorting that financial spread betting allows means you can hedge your positions. Say if you have a large stock holding in a company and you had bearish feelings about it in the short run but didn’t want to sell, may be it is in profit and I didn’t want to incur capital gains tax, you could open a short position using Financial Spread Betting and hope to make some profit in the short term.
No Tax
Current rules relating to financial spread betting mean that you don’t have to pay tax, neither capital gains or stamp duty. Now this was true at the time of writing this so always check with your local tax office to ensure that that you comply with the financial spread betting tax laws.
Reducing currency risk
I like to buy stocks in the US. Now because I buy in dollars my profits will be affected by the relationship between sterling and dollar. Now at the moment I am quite negative about the pound and have done well from stocks increasing and the dollar increasing at the same time. There are other situations where I don’t want the double exposure. Imagine there was a currency worse than Sterling (do your best to imagine!). I would be reluctant to buy shares in that currency because even if the shares did well, the currency devaluation may give all my profits back.
Leverage
One of the great advantages of financial spread betting is leverage, and often markets have margin requirements of only 3%. Now I will be going into how this works in a later post mainly covering the risks of financial spread betting. But just to give you flavour now, leverage allows you to exaggerate you profit as well as your losses. It is essential that you fully understand the concept of leverage and how it will affect your trades. Don’t get me wrong, leverage is good but only when you fully understand and you have taken all the necessary precautions.
