It has been a long time since we have talked about investing in detail here on the Savvy Scot, and while we are generally trying to find ways to save money, we also like to investigate ways to earn more and to create more sources of income, especially when they are passive or almost passive. So today I wanted to talk about spread betting. It is a topic I know little about, but have gotten familiar with recently, as I looked for ways to diversify.
Spread betting is a form of trading that allows your to place a bet on several products like shares, gold, or a currency pair, depending on whether you believe that financial product will go up or down when the term of the bet is over. You can go long or short depending on your analysis, and earn money for each point the product moved your way, or lose money for each point going the opposite way. You need to properly analyse the commodity or the share to make a decision, otherwise it looks like gambling. Then you place your bet with a spread betting company such as CMC Markets, and watch the market moves. Your position will start at a loss since there is a spread (the difference between buying and asking price) of 0.7 pts or more, and then as days go by, the position will either go in the black, or deeper in the red.
It can be stressful if the markets are playing against you. That is why you should start either with a demo account, or with small sums you wouldn’t mind losing. Then, once you get acquainted with the trading platforms and the tools at your disposition, like the charts and technical reports, you can move up and make bigger trades. That said, unexpected external events such as political news, or even a terrorist attack can have a negative impact on your bets, and you can’t see them coming. So I would always stay cautious with the amount invested.
Spread betting companies generally allow you to trade on margin. That means that you don’t need to deposit the full amount of the trade into your online account with them, you can deposit £100 for example, and make a £500 trade. If your position goes down to £400, your account is wiped out, and you have lost your £100. That is the risk of trading on margin, as many investors hold on too long to losing positions and that can result in a huge loss, especially if you are tempted to add funds as it gets worse.
In the end, you will have to decide which amount you are comfortable investing, knowing that placing a bet requires a certain amount of work beforehand, studying charts and graphs, reading the news… so while it has to be worth your while, you also want to remain reasonable and only allocate a small portion of your net worth towards trading. I would start with a small sum, then take back my money if I earn something, and get more aggressive with the earnings, which I would consider “free money”.
Regarding the fiscal aspect of things, spread betting is not treated like normal share trading, in that the profits from it are tax-free, which is good news.