Spread betting gives the trader the ability to place directional bets on a wide range of financial markets without having to pay the costs associated with trading the physical equivalent, such as owning shares or commodities.
This is just one advantage of spread betting, there are many more. Perhaps one of the biggest benefits especially for the retail trader is the fact that traders can place very small bets, often for as little as 50p per point of market movement. This brings trading within the range of many more traders, as the margin requirements and capital requirements are much less.
Other key benefits of spread betting include the fact that spread bets do not attract stamp duty. Additionally the trader does not have to pay income tax on the profits he or she generates, nor is ownership of the financial instrument required. This makes it a very attractive proposition.
The way spread betting works is that the trader places a bet on any market that he chooses, and depending on his view of whether the market will rise or fall he places an up or down bet. If he thinks the market will rise, he places an up bet, known as going long. If he thinks the market will fall and he wants to profit from that expected decline, he can place a down bet, known as going short.
Profits and losses of spread bets depend on the bet size per point and the amount of movement the market makes. The trader can select the bet size per point as long as he meets or exceeds the minimum bet size as established by the spread betting firm.
The profits or losses come by multiplying the initial stake by the number of points of market movement, calculated from the price at which the trade is opened to the price at which the trade is closed. This will give an amount of points that the market has moved, and this amount is then multiplied by the bet size to give profits or losses for the trade, depending on whether the trader was right is his assessment of the market's direction.
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