Reducing Your Risk When Spread Betting
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We have seen the same pattern repeating itself for some time now. The main world stock markets move up for a day and then down for a day, they move up for a session and then down. They move up for a week and then more poor economic data takes us back down.
This sort of price action though has its positives especially for day traders. Nevertheless when trading the stock market there are some risks regardless of which form of investment you employ. Whether it’s financial spread betting, CFDs, or traditional stock trading, it is likely that you will lose money on some of your trades.
One way of reducing your risk is to keep your trade sizes small. However financial spread betting offers a number of ways to help you reduce your risks, you can even put limits on your trades to reduce your losses but not your profits. And, as just mentioned, you could also make use of smaller stake sizes such as £1 per point or $1 per point.
To gain a small amount of exposure to the world stock markets you could just trade US or European Stock Market Indices, ie speculate on whether the Dow Jones, FTSE 100, German 30 or French 40 etc will increase or decrease.
With Financial Spreads you can trade any of these markets. If you speculate on the Dow Jones to go up, with a £2 per point stake, and it goes up by 60 points then you would make 60 points x £2 per point = £120.
Note that you can trade the markets in Dollars, Sterling or Euros. If you want to trade in Dollars then 60 points x $2 per point = $120.
Of course, should the market move against you, dropping by say 75 points, then with a £2 stake you would lose 75 points x £2 per point = £150.
Obviously this would not be a great start. However, with a number of firms like GFT you can add a Guaranteed Stop Loss at let's say, 40 points.
If you were speculating on the Dow Jones this would mean that your trade would be closed if the Dow Jones moved against you by 40 points. Therefore, instead of losing £150, you'd only lose 40 points x £2 per point = £80.
Of course, if you correctly predicted the direction of the market then you would still make a profit of £120 if it moved 60 points or £90 if the Dow Jones moved 45 points.
When financial spread betting there are plenty of other positives, not simply this risk management aspect. A key advantage with spread betting is that it offers a large variety of markets on which an investor can trade including stocks, commodities, foreign exchange and, of course, stock market indices.
You are also able to buy or sell markets. This is very useful as it allows you to trade on a given market in the direction in which you feel it is going to move. You are not restricted to speculating on a market to go up, you can also speculate on it to fall.
From a tax point of view, note that there is no exchange of any assets. You simply speculate on the future value of a given market. As a result, spread betting is tax free*, it is not subject to capital gains, stamp duty or income tax.
Before you trade though, note that with financial spread trading you can lose more than your original stake or investment. Spread trading carries a high level of risk to your capital. Before trading, ensure that spread trading matches your investment objectives. Make sure you familiarise yourself with the risks. Seek independent advice where necessary.
So take care when trading the markets. Remember that making use of Guaranteed Stop Losses and smaller stake sizes can lower your potential risks.
Spread Betting Markets - Indices Comparison
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| FTSE 100 Daily - Spread Size |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
| FTSE 100 Daily - Min Stake |
£1 |
£0.50 |
£2 |
£1 |
£1 |
£1 |
£1 |
£1 |
| FTSE 100 Future - Spread Size |
4 |
4-8 |
6 |
4 |
4 |
3 |
4 |
4 |
| FTSE 100 Future - Min Stake |
£1 |
£0.50 |
£2 |
£1 |
£1 |
£1 |
£1 |
£1 |
| Wall St Daily - Spread Size |
2 |
1 |
2 |
2 |
2 |
2-4 |
2 |
2 |
| Wall St Daily - Min Stake |
£1 |
£0.50 |
£1 |
£1 |
£1 |
£1 |
£1 |
£1 |
| DAX 30 Daily - Spread Size |
1 |
1 |
1 |
1 |
2 |
1 |
1 |
1 |
| DAX 30 Daily - Min Stake |
£1 |
£0.50 |
£2 |
£1 |
£1 |
£1 |
£1 |
£1 |
| S&P 500 Daily - Spread Size |
4 |
4 |
5 |
4 |
3 |
5 |
4 |
4 |
| S&P 500 Daily - Min Stake |
£1 |
£0.50 |
£1 |
£1 |
£1 |
£1 |
£1 |
£1 |
| Nasdaq 100 Future - Spread Size |
3 |
4-10 |
4 |
3 |
3 |
4 |
3 |
3 |
| Nasdaq 100 Future - Min Stake |
£1 |
£0.50 |
£4 |
£1 |
£1 |
£1 |
£1 |
£1 |
Comparison Notes
The above comments do not constitute investment advice and neither Financial Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
Article provided / approved by Financial Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.
'Reducing Your Risk When Spread Betting' edited by DB, updated 13-Jul-10
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