Investing and trading in the financial markets can potentially bring you profit, but it is not without its risks. The traditional method was to purchase stocks and shares in publicly listed companies. These would pay dividends, giving you a share of the company's profits over the year, but you could also sell them in the future. The hope would be that you could sell your shares at a higher value than you bought them for, making a profit in the long term, while still benefitting from regular dividend payments in the meantime. However, success is never guaranteed, and many factors can affect the market, meaning your shares might end up being worth less than you paid for them.

The problem with share trading is that it usually requires investors to have a decent amount of capital to invest, money that they are happy to sink into the market for months or years. Share trading can bring decent results over the long term, but many would-be investors found this a lengthy process. On the other hand, via spread betting, people can play the market with much smaller bankrolls and potentially withdraw profits daily or weekly instead. This opened financial trading to a wider range of investors, but what does it involve?

An Introduction to Spread Betting

Spread betting was created in 1974 and since then it has proved a runaway success. If you wanted to start today you'd be able to choose from markets like forex, cryptocurrencies, shares, bonds and commodities. It blends the ideas behind both investing and betting to let you profit from the change in a market without actually owning any of the financial assets yourself.

Spread betting is unique in that it also lets you profit when the market falls, as long as that's what you predicted would happen. Here's how it works:

Open an account with a trusted spread betting platform in the UK. Choose your market and a specific asset within, for example, you could wager on the derivative price of gold. You are confident that share prices are going to rise over the next few days, so you place a spread bet of £1 per market point when the shares cost 10,770. This means that for every point in value the shares increase, you'll receive £1. At the end of the week, if gold has risen to 11,000, you'll have made £30. However, if you're wrong and the share price falls, you'll lose £1 per point.

Spread Betting Terms

As with any activity, Spread Betting has its own language that you'll need to understand if you want to make the most of your money. Here's the lowdown on some key terms.

• Go Long – this simply means betting on the market to improve
• Go Short – to short the market means to bet on it declining
• Spread – this is the difference between the buy and sell prices of shares. Can also be known as the offer and bid prices.
• Leverage – betting with leverage allows you to pay a percentage of the total value of your position in order to gain access to higher profits. Stocks typically require you to pay 20% of the total value, but other markets can be less.
• Margin – the margin is your initial deposit needed to cover your leverage. For example, if you're betting £10 on the FTSE100 UK 100 at a value of 8,000 with a leverage value of 5:1, you need a margin of £1600 in your account.

Spread Betting Strategies

No gamble is ever guaranteed to turn a profit, but there are certain strategies you can employ when spread betting in order to maximise your chances. One popular amongst new traders is known as scalping. When scalping, the aim is to close positions quickly and take frequent, smaller gains, rather than risk the market turning again and posting a loss. Whilst this won't make you a millionaire overnight, it could potentially bring you a steady stream of investment income.

Another great novice betting strategy is called tramline trading. By plotting data on a graph and joining the pits and troughs, you will create a set of tramlines that will allow you to reasonably predict when the market will turn. You could buy before an upswing and sell before a downturn to get the best from your investment.

Is Spread Betting Profitable?

As with all investments, there is a risk of loss as well as reward. Spread betting can be profitable, but it takes time, effort, and analysis to potentially turn to profit. How well it works for you depends on how much effort you put into the endeavour and how much money you have to invest and lose in the first place.

In Summary

Spread Betting is a way to enter the world of financial trading without investing too much capital upfront. It allows you to bet on the state of the market – saying if it will rise or fall – rather than purchasing the actual financial asset. There is also the added bonus that profits from Spread Betting are tax-free in the UK and Ireland, meaning you get to keep 100% of what you make. (Note that tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.)

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.