The trading market is constantly evolving. Previously, many only knew about the purchase of shares and how you can sell in the future for an increased price. However, now it’s possible to make money on assets without even owning them through derivative trading.
All of this is possible by using a spread betting account. We will tell you how to use spread bets in this article.
What does it mean?
Financial spread betting can be an income-generating activity. The trader is not the owner of a particular asset, but only makes a bet on which way it will move, in favour of growth or decline in value.
The strategy has two components:
- the price at which you buy;
- the price at which you sell.
The concept of spread is the difference between these price values. In this case, the broker receives their income through the spread charge, which, in turn, eliminates the payment of any fees or commissions.
Using a spread bet, the user must determine the purchase price (if he thinks the asset will grow) or the sale price (if he is considering a drop in value), which is also known as going long or short. And you can bet on various assets: securities, currencies, and raw materials.
It is believed that the emergence of the concept of spread betting occurred with the help of the American mathematics teacher Charles McNeil. In the future, he became a securities specialist. This strategy was popular back in the middle of the last century, but was not of interest to professional players in the financial market for several decades. However, in the late 1970s, betting on the value of gold became popular. All due to the fact that investing in gold bars was difficult, this option has become attractive to many investors, especially beginners.
How does it work?
Regarding how does spread betting work, you don’t own the assets; instead, you speculate on price changes—this is a fundamental principle of how spread betting works.
There are a lot of assets that can be used for spread betting, such as a currency pair.
First of all, you have to choose your pair. After that, you should decide which position to choose: short (in the hope that the price will decrease) or long (hoping that the value will increase).
It is no secret that the exact data will be determined by a few specialists in the market. Logic, knowledge, luck and experience must converge here. When spread betting, losing your capital is much easier than earning. Therefore, do not rely on easy money. It does not mean that spread betting is only for experienced professionals. Here the question is in the competence and understanding of the process itself.
Once the position is selected, it is necessary to determine the amount of the deposit. In this case, you can count on leverage, meaning that you’ll only need to place a small deposit which is a percentage of the full trade value to gain exposure to the markets.
After the deposit is set, it is necessary to set a certain time (it can be hours, days and even months). At the end of time, a trader either makes a profit or loses his budget and suffers losses.
Sometimes intermediaries ask traders to have a considerable amount on their personal account in order to make up for potential losses, taking into account the provision of credit funds.
The legality of this form of trade
Spread betting, like investing in different types of assets, always involves some risk. On the other hand, there is an opportunity to earn big money. That is why participants in trading use borrowed funds.
With this type of betting, the investor does not own the asset itself, so he will not have to pay various fees for transportation and so on.
There are other examples: in Japan or the United States, this type of activity is generally prohibited. Since such bets are considered gambling and entail the possible complexity of taxation, spread betting is not a legitimate way to earn money. In the European Union, there are certain conditions for the use of borrowed funds, as well as other principles for protecting investors from the loss of personal savings.
In order not to be afraid to fall into the trap of unscrupulous brokers, you should use well-known platforms. It could be CMC Markets, which for three decades already has hundreds of thousands of users worldwide.
CMC Markets has an educational platform where it aims to detail the main points of the right investment. In addition, the platform has 24/7 technical support. An automated pricing mechanism, more than 11,000 tools – all this is created for competent earnings and user convenience.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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