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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when trading in CFDs. You should consider whether you can afford to take the high risk of losing your money.

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Spread Betting

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What is Spread Betting?

Spread betting enables you to predict whether the price of financial instruments will increase or decrease without owning the underlying market.

What Are the Benefits of Spread Betting?

  • Tax Efficiency: In some jurisdictions, such as the UK, profits from spread betting are exempt from capital gains tax and stamp duty, making it a tax-efficient way to trade.
  • Leverage: Spread betting allows you to control a large position with a relatively small initial deposit. This can amplify potential profits, although it also increases potential losses.
  • Access to Various Markets: You can speculate on the price movements of a wide range of financial instruments, including commodities, currencies, and more, all from a single platform.
  • Flexibility: You can go long (bet on prices rising) or short (bet on prices falling), allowing you to profit in both bull and bear markets.
  • No Ownership of Assets: Since you don’t own the underlying asset, you can avoid costs and complexities related to asset ownership, such as storage and maintenance.
  • Low Initial Costs: With only a small percentage of the trade value required as margin, spread betting allows you to enter trades with less capital compared to traditional trading methods.
  • Risk Management Tools: Many spread betting platforms offer tools like stop-loss and take-profit orders to help manage risk and protect your capital.
  • 24-Hour Trading: Some markets, particularly forex, can be traded 24 hours a day, giving you more flexibility to trade at times that suit you.
  • Rapid Execution: Spread betting platforms often provide fast execution of trades, ensuring you can take advantage of market opportunities as they arise.

These benefits make spread betting an attractive option for many traders seeking flexibility and the potential for high returns. However, it’s important to remember that the leverage involved also increases the risk of significant losses. Proper risk management and a thorough understanding of how spread betting works are crucial for success.

What are the Risks of Spread Betting?

A major risk is that you can lose more than your initial deposit.

Another is the risk of using leverage. Leverage can magnify gains, but it can also magnify losses which can exceed your initial deposit. Market volatility sometimes results in price moves that generate potential profits or losses in a short period.

Thirdly, Margin calls. When trading using leverage you must ensure the equity value of the account is always sufficient to cover the margin requirement of your open positions. The equity value is calculated as cash balance +/- PnL from open positions. If this dips below 100% of the margin requirement an account will be on a margin call. Failure to meet a margin call by adding more funds onto the account may result in positions being liquidated, to reduce exposure and to bring the margin requirement back below the equity value of the account. In the event of an adverse movement in fast-moving markets there may not be time to top up the account in between it going below 100% and hitting the liquidation level.

A good understanding of financial markets is a must for successful spread betting; otherwise, it’s easy to make mistakes.

Psychological stress is also another risk to be aware of. After realizing the potential for quick gains and losses, one can start to be influenced by emotions and make mistakes. Costs of spread betting, such as the spread or overnight charges, can reduce your total profit. Regulation changes could also influence trading and profitability.

Spread betting is different from traditional investments in that an investor is not entitled to the same dispersion law principle, making it speculative. Using stop-loss orders and only risking a small percentage of your account balance on each trade is a good practice.