This past week offered the worst performance of the stock market so far in 2012, and the outlook doesn’t look much better for many factors: the global economy, rising debt, poor employment, political instability in Greece and a Spanish banking crisis. With such uncertainty in the market, there will inevitably be a lot of volatility in stocks and other financial products. It is important to look for an investment that allows you to play off this volatility.
That is where spread betting comes into play. Spread betting is very similar to options trading, where you can profit from moving prices, whether they are going up or falling down. Just like investing in a call or put, you take a position and indicate whether you believe the market will rise or fall. You profit if you are correct in your spread bet.
For example, if you think a major index will increase in value over the next month, you buy that spread, and you can profit if the price moves higher. However, if the index doesn’t go higher and falls against your buy price, you will encounter a loss.
The Benefits of Spread Betting
Spread betting has some benefits that are different from a traditional options trade or indeed regular share dealing. Depending on the provider you use, you get choices on which investments you can bet on. If you choose a provider like City Index, there are literally thousands of different options to bet on. You can bet on stocks, indexes, currencies, commodities, sectors, and more.
Another benefit of spread betting is that you trade with leverage meaning that you can take a large position for a relatively smaller initial deposit (similar to a mortgage on a house). The amount of leverage once again lies in which company you invest with, but since your trades are leveraged, you can increase your gains dramatically. However, at the same time, you need to be cautious because leverage can also exaggerate a loss as well.
Finally, spread betting UK profits can be tax free, unlike profits from trading stocks or options. This is because many jurisdictions treat the profits from spread betting different than regular investing income. This can make a profitable trade even better since you don’t have to tax tax on the gains! However, UK tax laws are subject to change and may differ depending on your personally circumstances.