Spread betting is a type of speculation in which you place a bet on the price movement of a security – the security might be a stock, currency or commodity. A spread betting firm will quote two prices; namely, the bid price and the offer price. You can then bet on whether the price of the underlying asset will be higher or lower that that offer price. When you engage in spread betting, you are essentially speculating (betting) on the price movement of the underlying asset.
One cool thing about spread betting is the leverage that it provides investors to take make profits off an asset without owning the said asset. For instance, if you understand the stock market, you might have strong reasons to believe that stock XYZ might see an increase in its share price in the coming days; hence, you'll want to buy the stock while it is cheap. However, if the stock trades at $50 per share and you only have $200 to invest, you won't be able to buy more than four units of the stock (less commission).
However, with spread betting, you can stake $10 per point on the stock's $50 trading price. Hence, you'll earn $10 for every point gain in the stock. If stock XYZ gains 40 points before you close your bet, you would have gained $400, which is exponentially more than what you could have gained by buying the stock with $200.
It’s a Two-Way Street
Spread Betting provides you with an avenue to make money on an underlying asset without owning the said asset. More so, spread betting provides an opportunity to make massive gains on a small bet – as seen in the example above. However, spread betting is a two-way street and you might incur massive losses if you happen to be on the wrong side of a spread bet. For instance, (from the example above) you'll lose $10 for every point loss in the stock. If stock XYZ losses 40 points before you close your bet, you'll lose $400 on the trade.
Spread betting provides free money
Most folks often run at the mention of the word "Spread Betting": yet, spread betting can be an exciting and incredibly rewarding enterprise. Here is a spread betting example that shows how speculative spread betting can be massively profitable. Simon Cawkwell, otherwise known as Evil Knievil is one most-popular traders who has made a fortune on spread betting.
The Telegraph reports that he made £3m during the recession when most investors were losing money in stocks. In fact, it appears that Cawkwell makes money with spread betting by relying on the predictability of investors to be fearful when calamity strikes on the market—he reportedly made £1M after the 9/11 terror attacks.
You Must Understand the Game before you Play
Much has been said about Cawkwell's success with spread betting but he believes that he is not the only person that makes serious money from spread betting. He says, "People keep on publishing the fact that I'm successful… But there are plenty of other people around that make plenty of money." Some of his wisdom nuggets for a successful spread betting experience are provided below.
Cawkwell says the single most important reason behind his success in spread betting is a thorough understanding of how his preferred underlying assets work. Cawkwell does most of his spread betting on stocks, but he still makes serious money by betting on sport teams. Whether you are into stocks, forex or commodities, Cawkwell insists that you must know all there is to know about your preferred asset. Cawkwell has multitude of TV screens in his home and office with which he stays abreast of finance, economic and geopolitical news that might affect stocks.
He also hints that you must understand the dynamics of sport betting – some folks rush out to start spread betting because they heard that someone made a million dollars from the speculation. You should have a handle on the different possible scenarios in spread betting so that you can take calculated risks.
It Is all about Your Stomach for Risk
Cawkwell says you are not likely to succeed in spread betting if you don't have the stomach for taking big risks. He says, "Many private investors have been burned to the point of never coming back… It does attract the kind of people who are used to and enjoy taking risks." With spread betting, you can lose all of your stake and then some more, if you make a wrong prediction.
On the other hand, if you buy the wrong stock, the share price might fall, but your ownership in the business will remain intact. You have no business in spread betting if you are not comfortable with taking financial risks – you might be better off buying stocks.
Conclusion
Spread betting is an exciting way to make some money, but you need to understand that you'll lose some money, everybody does. However, Cawkwell notes that no amount of reading can make you successful in spread betting just as reading how to swim won't make you a perfect swimmer. You'll need to get into the water to learn how to swim and you need to start spread betting to learn the ropes.
Cawkwell says, "You have to learn on the job, keep alert and work hard" – however, you need to invest in your education before you start placing trades. Just like in swimming, someone that has read how to swim stands a better chance of surviving than someone that hasn’t read how to swim if both are thrown into a river for the first time.
