What is Online Financial Spread Betting?
A Guide to Day Trading Futures Using Online Spreadbetting Software
Mar 19, 2009
With the advent of fast stable internet connections, spreadbetting websites who supply real-time trading software such as Capital Spreads, IGIndex and Tradefair have flourished. The software provided by these companies supplies a daytrader with all of the tools required to identify a favourable signal to buy or sell on a future market position, to instantaneously transact a trade, to observe the trade conditions live, and to exit the trade, all without paying a broker's commission, and all online.
Financial spread betting online allows a trader to speculate across a wide range of currencies, on commodities such as oil, gold and wheat, and on share groups called indices such as the FTSE 100 and the Dow Jones. One of the advantages of spread betting as opposed to other forms of trading is that it is considered gambling, and any profits are therefore tax free.
What is Online Spread Betting?
Day trading futures online through software provided by a spread betting company uses the same process regardless of the nature of the product traded, be it commodities, currencies or index market futures. Each market at any moment has a value. That value can go up or it can go down. The daytrader speculates on this movement through the spreadbetting platform supplied by the financial spread betting company.
The financial spread betting company offers the daytrader two prices around the live or estimated market price. These two prices are known as the Sell or Bid price and the Buy or Offer price, and it is from these adjusted prices that the “spread” of spread betting gets its name. To clarify, the “spread” is an artificial price calculated by the spread betting company that adds points to the underlying actual market price.
For example, the live price on the Dow Jones Daily may be 4356. The spread betting company may quote a Sell price of 4354 and a buy price of 4358. In this scenario, for each trade a daytrader makes, whether they choose to buy or sell, the spread betting company will make 2 points worth of profit on the margin regardless of the outcome of the trade from the daytrader's perspective.
Spreadbetting for the Daytrader
Unlike fixed odds gambling, day trading futures with spread betting allows the trader to bet a stake that will represent their profit or loss multiplied by each point of the market movement. For example, if a trader believes the market will go up, and buys into the trade at $1 a point, and the market rises by 6 points, the trader will have made a profit of $1 x 6 points = $12. Another trader, buying into the market at the same time but at $20 a point, would make a profit of $20 x 6 points = $120.
Of course, the downside to this is that losses are also multiples of the initial stake. A third trader may have thought the market was going to fall, so chooses to sell rather than buy for $10 a point. The market instead goes up by 6 points, and this trader loses $10 x 6 = $60.
This is a factor of online financial spread trading that cannot be stressed enough. Markets are often volatile, and can go up or down hundreds of points over relatively short periods of time. A single trade at a high stake that sees the market swing in the opposite direction to that which the trader anticipated means that the investor can lose substantially more than their initial investment.
FSA Spread Betting Guidelines
Online financial spread betting offers the impulse gambler the opportunity to trade away a fortune that they do not necessarily have. The risks involved can easily bankrupt the unwary, so much so that the Financial Services Authority (FSA) regulate online spread trading companies by insisting that they display clear warnings about the dangers of spread betting on their website landing page, and throughout a prospective trader's application. Details of the FSA review of online spreadbetting can be found at the Financial Services Authority website.
However, despite the dangers, with a good understanding of risk assessment and money management, the careful daytrader can reap vast financial rewards in a far smaller timeframe than practically any other futures market venture currently available.
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