You may never have fancied yourself as a financial trader – it might be worlds away from what you do in your day to day job, but you might be surprised to find out that it’s actually a lot easier than you think, and that more people are involved than you’d ever know. It can be a great way of making some extra money, or even being a career if you’re good at it. There’s one particular aspect that a lot of UK traders are capitalising on, and that’s spread betting.
In this case, ‘the financial markets’ is referring to the foreign exchange market, or forex for short. Exchange rates are constantly in fluctuation, which means that if you buy or sell a particular currency, and then the value changes, you can potentially make a profit or a loss. This market is actually bigger than the stock market.
Now, buying and selling currency is just one way of profiting from price changes. A simpler and arguably more effective method is spread betting. All this means is that you wager money per point that the currency price changes.
Here’s a quick example of how it works:
- The exchange rate is GBP/USD1.5959, which means that one pound is worth 1.5959 US dollars.
- You open a spread bet, buying at 1.5963, with £10 per point. This means that you cannot begin earning a profit until the price moves from 1.5959 beyond 1.5963. This 4 point difference is known as the spread, and is how the broker (the company that handles the transaction) makes a profit.
- The price moves to 1.5968. You could close the position now, which would net you a profit of £50, or you could wait to see any further action.
- The price drops down to 1.5962. If you closed now, you’d lose money, but you believe that the price will rise again.
- Your prediction is correct, and the price edges up to 1.6965. You decide it’s best to close the position, and you earn £30.
This is a very brief example of how things work, but it gives you a good idea of the profitability of spread betting. All of this could happen very quickly too.
One of the major bonuses of spread betting, especially over other forms of financial trading, is that it is classified as gambling which means that it is exempt from tax. This leads us on to the final question however; if spread betting is gambling, how do people know when to open a position?
The answer is that spread betting isn’t really gambling. You do not just guess which way prices are going to move. There are instead a wealth of indicators which suggest to you the direction in which the rate will go in. This includes economic announcements, and signals gained from watching patterns on price charts.
Spread betting is ideal if you’ve got a little starting capital, and you’re willing to learn before you give it a go.