Pros and Cons of Spread Trading
Spread trades are much simpler and easier to understand and to trade compared to other derivatives such as options and warrants. Spread trading, like CFDs, also allow you to go long, or to go short. It is all nice and dandy when markets are rising but do you have a strategy to defend your investment when markets fall? Are you ready for a market correction, for example? When the time comes, few are able to sell to cash and sit and wait for things to turn -it is exceedingly difficult because there is no “buzz”, and some of us do it for the buzz 
Some turn to shorting – and spread trading allows you to do this. Going short and Going long are are terms that reflect on the price of the shares with which you are trading, if you go long, that means that you are trading on the fact that the value of the stock will rise, whilst going short, conversely is trading on the prediction that the value of the stock will drop. This is one of the most attractive features of spread bets as you can trade long and make money on a rising market or trade short and make money when the market is falling. Going short, however, when it comes to spread bets is in effect short-selling, and this means that you stand to profit from a fall in the price of an asset.
One of the advantages of spread bets is that there is a wide variety of shares and indexes that you can trade upon. With spreads bets you can trade currencies, commodities, global stocks at a fraction of the price of any other product. I trade local UK markets and internatioanl markets from the same keyboard, even place orders via an iPhone or Android – it is the easiest, fastest and cheapest way to trade. It is important, though, that you know the market you are trading in very well before you begin. It is possible to lose large sums of money in spread trading, and the companies that operate CFD trading, like Capital Spreads, are keen to make sure that those who trade on them know what they are doing.
The major advantage of spread bets is that the commission is low, the same process on the stock exchange would require a lot more capital, and would also be subject to UK Stamp Duty that would minimise your profits. Capital Gains Tax is also not an issue as spread bets count as gambling and therefore are subject to gambling tax.
Spread bets are good because you can hold them for short periods, so in turbulent markets like the current ones you can buy or sell very quickly in order to try and turn a profit. There is no need to hold them and hope that your investment will mature. The flip-side of this, of course, is that they are bad value for long-term investors.
Spread betting in itself is also relatively easy to understand and it is very easy to trade. The price of spread bets will move as the actual stock price moves. The fact that you are trading on margin means that you only need a small percentage of trading capital to open up sizable positions in the market. Some spread betting markets may only require 5% margin and for most spread traders the ability to trade on margin is one of the biggest attractions of spread bets as it increases the opportunity to make profit using a small capital. Though, it must be remembered that this cuts both ways in that leverage magnifies both potential profits and losses.
Spread bets also pay dividends on rolling long positions in a similar way to dividend paying shares. Spread betting brokers even pay the dividend amount immediately, which is good as you don’t have to wait for weeks as with some brokerage companies. One thing to bear in mind is that whilst you might receive dividend payments where applicable, you also will have to pay them to the broker if you choose to go short, however, as going short is currently outlawed on large proportions of the stock exchange, it is not something to be concerned with.
Most spread trading brokers allow you to place stop-losses (the spread betting and CFD trading company Capital Spreads offer a fixed risk account for instance), this means that you will not lose all of your money if it so happens that your judgement is wrong and the share value moves in the other direction. However, not all brokers do, and even if they do it might be set at such a level as to seriously damage you financially, make sure that you check where the stop loss level is, and keep it in mind.
Spread trading is a dangerous commodity and not for the inexperienced, buying in spread bets means that the FSA (Financial Services Authority) will believe that you are a professional and, as such, you will lose some of the protection that you may otherwise have received. Be careful when engaging in the trade of spread trading and make sure that you know the markets that you are playing with. When uses wisely trading on margin can help you magnify returns and maximise trading opportunities.
The biggest danger of trading spread bets is that you can lost an amount in excess of your deposited amount. Advantages include being able to take advantage of short-term market movements, the opportunity to hedge a shares portfolio, access to global markets and the ability to profit from markets that are falling in price. So, when they are good they are REALLY good, but when they are bad they they can rotten if you’re not careful with stops.