Online Calculator | The Myths Surrounding Financial Spread Betting

The Myths Surrounding Financial Spread Betting

There’s been a lot of talk about derivatives, CFDs and financial spread betting explained during the recession.

In Australia CFDs have been causing consternation in the mainstream media after a CFD provider collapsed almost overnight earlier this year. The Australian Securities and Investments Commission moved quickly to release a white paper to help educate consumers about CFDs and then announced that it is to keep a very close watch on the industry.

With Ireland due to announce new rules shortly and with derivatives legislation one of the many items on the agenda for world leaders at the G20 summit in Seoul in November have they really contributed to the financial difficulties we find ourselves in?

For those who don’t know what a derivative is, let’s take a look at spread betting as an example.

Spread betting explained

Essentially financial spread betting providers give you the opportunity to bet on the the future price direction of an instrument. When spread betting on financial markets you would ‘sell’ (go short) if you think a share will go up in value and ‘buy’ if you think it will increase in value.

It’s worth re-iterating that when you spread bet on a financial instrument you never actually own the asset, you are making a judgement on its future value.

The degree to which you are correct in your judgement, the spread offered at the time of your bet and the amount you bet per point will dictate how much you will win or lose.

The spread is simply the difference between the price at which you ‘buy’ and the price at which you ‘sell’ in a particular market. As an example, say the spread betting provider is offering the FTSE 100 Daily at 4025 / 4027. The spread is two points: if you want to ‘buy’ you do so at 4027 and if you want to ‘sell’ you do so at 4025.

Spread betting gives consumers access to increased leverage and that’s one of the reasons why it’s becoming more popular. Margin means that the individual only pays a small percentage of the total physical value of the shares they want to put a bet on. Therefore, in theory, the spread bettor can gain the same amount exposure.

Please note also that while financial spread betting can result in magnified profits, losses too can exceed your initial deposit, so always make sure you fully understand the risks involved in any bet. To be successful at financial spread betting you must understand the risks involved and, more importantly, manage your risk exposure rigorously.

There are ways and means of doing this. It’s a good idea to make sure you place a stop loss on any position you take and that you never risk more than 5% of your capital on an individual bet.

Whatever your opinion about financial spread betting a good place to start finding out more is IG Index. IG Index is the oldest spread betting company in the world having formed in 1974 and they provide an extensive educational programme, a range of risk management tools and in-depth market analysis to help those new to the industry learn how to spread bet and learn more about the financial markets. Visit www.igindex.co.uk for more information.

As previously mentioned financial spread betting is a leveraged product so it’s vital you understand the risks involved.

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