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Share trading
How to profit
from spread betting
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| Spread betting is mainly for speculators. |
How spread betting works
You bet on your belief that a share price, an index, interest rates or similar will move in a certain direction.
You can place your bet over the Internet, by e-mail, or by phone.
The financial bookmaker will quote you a two way price, not knowing whether you are buying or selling. You may then place your bet. You will pay only 10%–15% of
the sum you are betting, which is useful if you are short of liquid funds.
You will pay neither commissions nor fees to the financial bookmaker. It makes its money entirely from the spread – the difference between the buying and selling
prices – which becomes narrower in liquid markets.
The spread must be covered before you can make a profit. You will pay no stamp duty on purchases, and your profits will be free of capital gains tax.
Stop losses and limit orders
When you
place a bet, it makes sense to use a stop loss because it sets a limit
on your losses. Unfortunately a financial instrument can fall too fast for
you
to
apply the stop at the set percentage level.
To avoid this, use a guaranteed stop (unavailable on options). This will
cost you more but it protects you reliably against losses beyond the stop
level.
Consider using a limit order, which enables you to close a bet at a predetermined
profit level. Some traders take out a stop loss and limit order at the same
time, so defining the perimeters within which they will make a profit and
loss.
Taking a
short position
To take a short position
is
to sell an investment that you do not own that you will buy back later, hopefully
at a profit, to meet with the requirement to deliver the shares. This bearish
investment technique – no longer easily possible in conventional investing – is
often done through
spread betting.
Arbitrage
Arbitrage is when
you make a profit based on the difference in the spread on the same bet offered
by two respective bookmakers. This is less easy than it was because there
are more brokers than before and the prices are more competitive. You need to
be quick off the mark.
Contracts for difference
Some spread betting
firms offer facilities for trading contracts for difference. The CFD, as it is
known, is an agreement between two parties to exchange the difference between
the opening and closing price of a contract, multiplied by the specified number
of shares, as
calculated at the contract's close.
CFDs are available on the top 350 stocks in the UK, as well as on selected stocks in continental Europe and the US. By investing in a CFD, you are not the
registered owner of the underlying share, but are entitled to dividend payments.
Like spread bets, CFDs are highly geared. You will not pay stamp duty on your
CFD purchase, but will be liable for capital gains tax on your profits.
Generally, CFDs are more cost-effective than spread bets, but you should buy
from a broker, where the pricing is more competitive. The spread betting firms
lay off their own bets through CFDs.
| Some people make more money from writing and speaking about spread betting than they do from placing their own bets. Beware of paying extortionate sums to these sharks. If you have had experience of this, write in to us via the FlexiForum. We want to hear from you.
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To find out more
about spread betting, read
Everyone's Guide to Online Stock Market Investing by Alexander
Davidson, published by
Kogan Page. The book gives an unbiased overview of spread
betting,
and
lists the
best web sites. It offers valuable tips on how to reduce your risk.
The Times:
How the City Works, by Alexander Davidson, published by Kogan Page, gives you
a comprehensive view of how spread betting, futures, CFDs and other derivatives
work.
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