Trading stocks is one of the primary ways that a large percentage of people make money today. The practice is so popular because it gives those who participate, the chance to change their financial fortunes and become financially independent.
Some stock trading is done very passively where investors work with a broker to purchase stocks that they will hold long term believing their share prices will rise considerably over time. Other stock trading involves getting in and out of stocks in shorter time periods. For example, many investors have turned to day trading where stocks are bought and sold many times each day. Profitable day trading entails being able to understand the up and down movement tendencies of a particular stock and then being able to anticipate which direction a stock will move over short periods of time. In some cases a day trader can make money on a stock over a period without the stock closing up or down in price during that period.
Trading stocks requires a large up-front investment because you must purchase the stock in order to trade it. With share prices today of many popular stocks above $200 per share, purchasing stocks can be a capital intensive business. For this reason purchasing stocks traditionally only makes up a portion of the trading done in the marketplace. There are other ways where investors participate in the stock market that are less capital intensive. One of the most vibrant areas of participation is in derivatives.
Derivatives are Smarter Investments than Stocks
A derivative is a contract between parties where the value is based on an underlying asset. These assets include: stocks, currencies, commodities and bonds. Stock options are a type of derivative that is very popular because it allows investors to gain from movements in a stock without having to purchase the stock. Purchasing stock options and other derivatives can be risky and technical and those who engage in this business typically have a formal strategy that they utilize. One popular derivatives strategy is spread betting.
Why is Spread Betting so Popular?
Spread Betting is a derivative strategy that is designed to allow investors to quickly and cost-effectively take advantage of the movements of a stock. The strategy also offers the following benefits to investors:
- Investors can leverage stock for a fraction of the cost of the stock and profit a comparable amount in a stocks movement.
- Investors can bet on and profit on a stock when it moves in either direction.
- Investors do not have to pay commissions for their investing. The spread price includes broker fees.
- There are tax benefits to spread betting over stock investing. Spread bets do not incur the same tax consequences as investing in stocks.
Spread bet investors interact with spread-betting brokers who present investors with the current price, a buy or bid price, and a sell or ask price for a stock. The difference in these two is called the spread. The investor aims to guess whether a stock’s price will rise or fall and makes his bet. If he believes the stock will rise within the contract period, he will take the bid price, if he believes it will fall he will take the ask price. If the investor makes a correct bet, the will gain a profit from the spread. The investor has an ability to use leverage and further increase his potential profits.
Risks in Spread Betting and How They are Managed
Like stocks spread betting carries considerable risk, but the risks in spread betting can be higher than stocks. If an investor’s pick moves in the wrong direction, the investor can lose some or all of his investment. If the investor has leveraged his position, he can lose more than his actual investment. Spread betting offers a set of tools however to assist investors in mitigating their risks. The most popular tools are standard and guaranteed stop loss orders which can close out trades at the best available price or at the price the investor has set. Use of either of these tools however will cause the investor to incur additional broker fees, but using them can be an effective risk management tool. More sophisticated investors also use two-way betting or arbitrages to mitigate risk.
Spread betting has gained in popularity lately because of the availability of online platforms that provide investors with places to make bets and use powerful tools that assists investors to make better investment decisions. For those looking to get involved in the stock markets for a smaller investment and less fees, try the best trading platform in the UK. Using their platform for spread betting is an excellent choice.