Spread Trading: Long and Short
For people or investors who don’t know how to trade, even more importantly don’t know about how to profit from falling markets by shorting them they are in for some tough times!
With spread betting you can either go long or short -:
Going long: Going ‘long’ means you open a spread betting position by buying it with the expectation that the price will go up and then selling it at a higher price, that’s when you make the money.
An example of a ‘long’ trade spread bet
STEP 1: TO OPEN A TRADE, YOU BUY:
The spread betting provider is quoting Barclays: 149-151p. You go long £100 per point at 151p with a 5% margin requirement.
100p per point is the equivalent of 10,000 shares in Barclays. You put down £755 as initial margin [10,000 x 1.51 x 5%].
This means you will be required to have at least £755 in your spread betting trading account to open this Barclays share spreadbet.
STEP 2: TO CLOSE A TRADE, YOU SELL:
After you bought Barclays stock, prices jumped in the international market overnight. The following day the price of Barclays stock also goes higher and you would like to close your Barclays spread betting position.
You sell £100 per point Barlays stock at 160p (9p profit on each share) for a £900 profit.
A key advantage of trading spread betting is it gives you the ability to trade short and therefore the opportunity to make money even if prices are falling.
Going short: Going ‘short’ means you open a spread betting position by selling it with the expectation that the price will go down and then buying it at a lower price, giving you the profit even if the spread betting price goes down.
Example of a ‘short’ spread trade.
STEP 1: TO OPEN A TRADE, YOU SELL:
The spread betting provider is quoting Ladbrokes stock: 132-133p. You go short £100 per point at 132p with a 5% margin requirement.
100p per point is the equivalent of 10,000 shares in Ladbrokes stock. You put down £660 as initial margin [10,000 x 1.32 x 5%].
This means you will be required to have at least £660 in your trading account to open this Ladbrokes short spread trade.
STEP 2: TO CLOSE THE TRADE, YOU BUY:
In the next few days following you taking the short Ladbrokes position, market sentiment takes a turn for the worse and this puts downward pressure on Ladbrokes stock price which falls to 121p.
You buy £100 per point Ladbrokes stock at 121p (11p profit on each share) for a £1,100 profit.
Note that selling short is somehow more risky than opening a long position because markets have unlimited upside and limited downside. You can control the risk by utilising stop losses, in which case an automatic instruction to buy at a certain price somewhere above the entry point is tied to your sell trade.
Also, keep in mind that short-sellers are responsible for any dividend disbursements that become due while they are holding the short position. To avoid having to pay the dividend make sure to check the economic calendar to check that the stock you are considering to short is not about to go ex-dividend.
I still manage to make more from my downbets than from my upbets. That may be just because I’ve focused on down bets for such a long time and developed some kind of feel for them I guess. At present, and for most of this past year, I toggle between down bets and cash – with only the occasional smash-and-grab up bet…
It is true that in the the long term a particular asset is more likely to rise than fall. The point is that on its way it will have swings of up and down albeit with the primary trend being up. Many traders take advantage of these temporary downswings to develop a system with positive expectancy whereby they short sell.
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Financial spread bets are wagers placed on financial products in the attempt to guess the trend of the value of the product. For example, an oil barrel is worth $40 at the beginning of the trade and the spread is $38-$42, you place a bet on whether the price of the oil will go above or below the spread.
If we take that specific example and say that the bet placed is that the price will go above $42, at the end of the bet the price of oil is $45 and the bet was placed on the sum of $50, you just won $50*$3 = $150 (45-42=3). If the price went the other way you will have to pay the same amount to the spread betting company.
There is a risk in financial spread bets, there’s also a chance for a big profit if your bet turns out right. In order to avoid big losses you can stop loss your bet and so if we go back to the previous example, we can set the stop loss at $40 if you bet on the price to go up and it went down, or at $47 for example if you bet on the price to go down (short).
In anyway it’s up to you in terms of the amount you risk and the trend of the price and of course the stop loss which is very important.
In financial spread betting you can bet on a variety of products including stocks, commodities (oil, gold, gas) and even forex.There’s a big difference between financial spread betting and forex. Forex for that matter is much more complicated as financial spread betting is somewhat similar to sports betting in terms of type of wager.
Financial spread betting is illegal in the United States but completely legal in Europe and particularly in the UK where it’s also licensed.Financial spread bets are especially attractive as they cover various aspects of the financial markets and not limited to forex or CFDs or other financial related online spread trading, but include most of the common financial markets.