What is spread betting?

Spread betting enables you to profit from the price movements of stocks, commodities, currencies and even the entire index, irrespective of whether it is falling or rising, provided that the price of the underlying asset is moving in the direction of your bet. Spread-betting is a derivative product, which means it is a contract that derives its value from an underlying asset or index.

How does it work?

Say, for example, you have a hunch that the share price of company X is going to rise sometime in the near future. So you bet “long,” your profits will rise in line with any increase in that price. If company X shares rise your bet will yield profits. However, assuming that you take a pessimistic view of company X and you anticipate a poor trading quarter for the company where it is likely to miss its sales and profit targets. Company X results are out next week and you take the view that these trading results are likely to disappoint the market, causing the Company X's share price to fall. So you decide to go “short,” this means your profits will rise in line with any fall. So you are actually profiting from Company X's falling share price, if indeed its trading results are poor and the share price falls. However, if you had gone “long” and company X's share price fell you would have incurred losses.

What are the advantages of spread-betting?

The ability to profit from rising and falling prices, provided that your bet is inline with the price movements. To protect your portfolio of investments in the event of a market crash, this is known as hedging. Derivatives can be used like an insurance policy to protect your investments during political and economic instability All profits are free from capital gains tax, because you don't own the underlying security you pay no stamp duty or commission You can leverage your investment returns with a small deposit. For example, you can trade 10,000 pounds of Vodaphone shares by only depositing an initial 500 pounds. So you can increase your exposure with a small deposit.

What are the disadvantages of spread-betting

The main cost of placing a spread bet is the spread, which is the the difference between the buy and sell price and can change between markets and trades. The margin, which is the small percentage of capital usually 5 percent and depends on current market conditions. You must have sufficient funds to cover the requirement for all your open trades If you are trading “short” and the asset rises your losses can be unlimited and can exceed the amount of your investment. Spread-betting may not be suitable for all investors. Trading with stop losses are highly recommended.

What is Forex?

Forex is an abbreviation for "foreign exchange," and the term is used to describe trading in the foreign exchange market by investors and speculators. The forex market is massive in size, worth approximately 5.3 trillion US dollars per day, which is more than every car, washing machine and service provided and made in Europe's largest economy in one year. It is the speculative activity on the forex market that has seen tremendous growth in recent years.

How does it work?

For example, imagine a situation where the Euro is expected to weaken in value relative to the US dollar. a forex trader will sell euros and buy dollars to profit from the depreciating euro and rising dollar. If the dollar strengthens, the purchasing power to buy euros has now increased. The trader can now buy back more euros than they had to begin with, therebymaking a profit. Derivatives are used on the forex market to trade “long” and “short.”

Why do exchange rates fluctuate?

Currencies are trade on an open market so its price fluctuates according to supply and demand, just like with stocks, bonds, computers, cars, and many other goods and services. When demand for a given currency rises, either due to an increase in exports or speculative demand and supply remains constant, then the currency will rise. Likewise, a decrease in demand for a given currency, or an increase in its supply will cause the currency to fall on the foreign exchange market.Macroeconomic data can influence a currencies price on the foreign exchange. For example, Gross Domestic Product figures, employment data, inflation rates, manufacturing and service output data can all be price sensitive, with respect to a country's currency. The main advantage of forex trading is that you can buy or sell any currency pair, at any time subject to available liquidity. So if you believe that Euro bloc economies are heading for sharp downturn you can sell the euro and buy the dollar (sell EUR/USD). If you think the price of gold is going to go up, based on historical correlation patterns you can buy the Australian dollar and sell the U.S. dollar (buy AUD/USD). So there is no such thing as a "bear market," in the literal sense, since investors can make (or lose) money when the market is going up or down.

What is an ETF?

An ETF is an “exchange traded fund”, These type of investments have been around since 1993. ETF is similar to an index fund, in the sense that it has the same goal: To provide investors with a benchmark return at minimal cost. The advantage of EFTs is that they are often trade commission free, while Index funds can be costly to trade and out of range for the average retail investor. However, not all ETFs are designed to mimic index funds, so investor need to be careful. Some have become little more than trading tools. One of the most widely known ETFs is called the Spider (SPDR), which tracks the S&P 500 index and trades under the symbol SPY. ETFs can also be used for speculative trading strategies, such as short selling and trading on margin.