Spread betting continues to be a popular opportunity to speculate on the financial market in many European countries. But with the potential for big wins, the risks loom large as well.
If it's something you're looking into, don't go in blind. Before you, part with a single dollar of your hard-earned money takes some time to familiarize yourself with these spread betting tips.
First off, what is spread betting? It's different from investing in stocks, in this case, you don't actually own anything, but are speculating on if the price of a stock will go up or down.
While you aren't entitled to dividends or investor rights, there's a lot of money to potentially be made with spread betting. Based on a points system, depending on how much you bet per point, you'll make or lose that amount every time the asset moves. At ten pounds per point, and the point is set at 100, you make or lose ten pounds every time the asset moves 100 points.
And unlike buying traditional shares, you can go short as well as go long.
But if you want to be successful in spread betting always remember:
The best traders know the industry they're investing in. Warren Buffett has said, "Never invest in a business you cannot understand." If you don't understand the market, you may struggle to provide a proper valuation without being familiar with all the factors influencing things behind the scenes. If it's sports, make sure it's one that you follow and intuitively understand the big picture. If you know technology or steel, chances are you'll make a lot more money if those are industries you have an interest or passion in, compared to one that mystifies you.
Managing risk will save you a lot of grief in any venture. The reality is, spread betting is no different. One way to guard yourself is by using a closing order or stop losses. Choose a predetermined price that once triggered, automatically closes the trade. It's always possible the trade will go against you, and a stop-loss order ensures that you can stomach the loss, and keeps you from losing much more.
There will always be ups and downs. Being emotional and financially prepared for trade losses will be helpful when winning the long game. The classic downfall is aggressively and recklessly trying to "win big" on your next trade to recoup a loss.
Again, legendary investor Warren Buffet has said, "Remember that the stock market is a manic depressive."
Or as Kenny Rogers would caution, "know when to fold 'em/know when to walk away/and know when to run."
Downturns are expected, as are opportunities; being ready for both will make you successful. According to Buffet, "Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it's imperative that we rush outdoors carrying wash tubs, not teaspoons."
Like all trading, don't keep to one market, but instead spread out your risk by putting your proverbial eggs in multiple baskets. But at the same time, it's tempting to get into too many markets. Sometimes it's best to specialize in a few markets that you know and have proven to be profitable. A handful of good baskets is better than 20 questionable markets.
It's easy to assume that just because you're predictions are more often right than wrong you're staying profitable. But spread betting is more than winning; it's about how much you're making when you win, versus how much money you lose when you're wrong. If you're wrong 60 percent of the time, with an average loss of 100 pounds, but your average profit when you're right is 500 pounds, you're making money! The temptation is they only focus on being right as often as possible. And while that's admirable, don't forget to focus on minimizing your losses and maximizing your profits.
In fact, if you're starting out, keep trading small, even to one pound per point until you get a firm grasp on spread betting.
There are always risks when it comes to investing and spread betting is no different. If the price of an asset goes against you, you're losing money.
But the big risk is liquidation. Because you're required to cover the margin on your spread betting trades if the broker asks you to deposit 10 percent of the total amount you wish to trade, and the asset goes down by 10 percent, and you don't add more funds to cover the margin, your trade would be closed automatically.
It's possible to exit a position too early after a trade has begun to make a small profit. While the market will not keep going the way you want indefinitely, it could keep going in the right direction for a while longer. However, don't be greedy. It's always tempting to see how high you can fly, but like Icarus, flying too close to the sun will melt your waxwings and lead to your downfall.
Always have a plan and know what you're willing to risk on every trade. Every person is different, some may have more appetite for risk, you may have less. Where you fall on the scale, make sure you only risk what you're willing to lose and you have enough in your account to reach your goals.
Slow and steady always wins the race. Every trader loses money, but the ones who do their homework, make a plan, and stick to it are more likely to come out ahead.
In the end, like in any endeavor, if you want to win, you gotta have a plan. Like Benjamin Franklin once said, "If you fail to plan, you are planning to fail."