Welcome to Plan B Trading. In this short segment,
we ask the question: What is spread betting? Spread betting is a way of speculating on
a future event and profiting from it. Spread betting originated in the world of
sports events. The betting part of the name is the stake placed on an event occurring,
for example, soccer results, or winning margins. The spread part of the name is the amount
taken by the bookmaker. Spread betting was then extended to cover
financial markets, for example, is the stock market going to rise or fall today? And by
how much? This video is limited to the use of spread betting in the financial or trading
arena, where traders speculate on the direction of price movement. Pretty much any financial
instrument can now be traded using spread betting.
As speculation is on the direction of price movement, up or down, it means spread betting
can be used to produce profits when prices are rising AND when prices are falling.
You’ll be able to open a spread betting account with a broker, although spread betting
is not available in all countries. If you’re unable to obtain a spread betting account,
you’ll need to trade currencies through a Forex account instead.
There is more information about the spread, or the broker’s margin on our FAQ titled:
“What is the spread?” at www.planbtrading.com. Let’s run through an example trade. This
is the same trade as the one taken in the video “What is a Forex account”. Suppose
I am trading EuroDollar and I expect the exchange rate to rise.
The broker shows me the prices at which I can buy and sell this currency, buy at 1.2520
and sell at 1.2518. Ooops, the price has just changed. That often
happens when you are preparing to trade. I am going to take a long position in Eurodollar,
which means buying the currency. My trade amount is expressed as an amount per pip,
in this case, I am trading at £5 a pip. The amount you trade per pip is determined
by the process called trade sizing. I have £10,000 in this account and I am limiting
my risk on this trade to just 1% of that amount, or £100.
A pip is the currency number expressed to the fourth decimal place on most currency
pairs. In this case, a movement from 21 to 22 is 1 pip. A movement from 21 to 20 is also
1 pip. As I take the trade and buy the currency,
my position is shown along with the original purchase price, 1.2521. The current price
is shown, 1.2519, which is the price I will achieve if I exit this trade right now. A
running profit and loss is shown as well. I’m currently down 2 pips, the difference
between the buy price at 21 and the sell price at 19. At £5 a pip, this is £10.
Let’s watch this as the price changes. Notice as the price increases, my P&L position
improves. Now the price has moved 2 pips, I’m breaking
even. Each pip of price movement is worth £5.00,
as that was my initial stake. As the price continues to move in my favour,
the profit on the transaction grows. The price has moved 7 pips above my entry
price now. This transaction has reached my target price
of 20 pips profit. Let’s close the trade and bank the profit. 20 pips of price movement
didn’t take long in this video. Sometimes, the market will be even quicker than this
video. Let’s run through the trade.
When I closed the trade, there was 20 pips of profit, the price having risen in my favour
as I’d bought the currency. This adds up to £100, as my stake was £5
per pip. Had I staked £10, my profit would have been
£200, 10 multiplied by 20. And so forth. Of course, if the price had moved in the opposite
direction, my losses would have accrued at the same rate, meaning a 20 pip shortfall
results in a loss of £100. One of the strengths of spread betting is
in its simplicity. I used UK pounds to trade the Euro and the US Dollar and did not have
to do anything other than open and close the trade.
Another advantage is the profits are tax free in the UK and Ireland. Simplicity and tax
free, great combination. Hold fire though. It is possible to make losses
with spread betting when prices move against you.
You need to understand risk management fully, plus the use of stop losses.
It’s not just when prices are rising that you can make a profit, you can profit just
as easily from falling prices by short selling. A similar video called “What is short selling”
is hosted on Plan B’s FAQ page at www.planbtrading.com and this shows a short trade.
If you still have questions, why not call 0203 603 4983 and talk to a trader now.
You’ll learn spread betting and other ways to trade when you attend Trading 101, our
entry level course. Book your place on Trading 101 or have a chat
with one of our traders by calling 0203 603 4983 now.
You can find more information about coaching and our training programmes and you can book
online at www.planbtrading.com