In the world of investments, spread betting has become increasingly more popular among traders, professional and amateur investors, and money brokers. Financial spread betting comprises three different components.
- The spread is the charge you pay to open your position.
- The bet size helps you to determine the amount of capital you put up.
- The bet duration dictates how long your position will remain open before it expires.
In this article, we are going to look at how spread betting works. After reading it, you should have a much better understanding of spread betting, which in turn, will help you become a more successful and prosperous investor.
How Does Spread Betting Work?
Let’s have a closer look at the three components:
The Spread
In the world of stock markets, forex, commodities, and other assets, the spread refers to the difference between the lowest and highest ask and bid prices (respectively). If fictitious company ABCD’s lowest ask price is $1.00 per share, and its highest bid price is $1.50, its spread is $0.50.
We also refer to the ask price as the offer or buy price, and the bid as the sell price. Investors buy slightly higher and sell marginally lower than the market price.
Most market makers, brokers, and other providers typically quote their prices in the form of spreads. The underlying price of a security lies somewhere between the two.
The Bet Size
The bet size is actually the amount you bet per unit of moment of the underlying market. There is amazing flexibility; you can simply choose your bet size as long is it is more than or equal to the minimum price accepted in the market.
Now, on the basis of this, your profit or loss is calculated according to the difference between the opening price as well as the closing price of the market, multiplied by the value of your bet.
The Bet Duration
The bet duration is the length of time before your position expires. All the spread bets have a fixed timescale. However, these lengths can range from a few days to several months long. The best part is that you can simply close them in the middle as and when you want before the bet expiry time, simply by assuming the bet is open for trading.
Risk
When you start trading, you need to learn and respect the market, otherwise it will eventually strike you down. You should not risk more than 2% of the total amount you have in your account.
According to Spreadex , there are even experienced traders today who get their fingers burned because they got overexcited and exceeded their 2% limit. Investors need to lose sometimes – it is the best way to learn. However, a loss should not put you out of business.
Conclusion
This is all from our side about how spread betting functions. If you are a newbie, take your time in absorbing all the parameters involved in effective investment procedures. There is a lot to take in. Even though it is crucial to know what it is all about, you must also able to use it in real time, i.e., instantly.
Interesting related article: “What does Investment mean?“