Stock Spread Trading
Like many, you may have been drawn to the stock market, thinking that the constant fluctuations in prices of stocks represent a great opportunity for the savvy trader to buy low and sell high, making money with far less expenditure of effort than trying to “work” for a living. Unfortunately, as you may have discovered, stock trading has several disadvantages, including getting the initial stake together, on which, if you are lucky, you could earn 5%-20% per year. Now that stock spread trading is generally available, there is a far better way to profit from the company research that you do.
Spread trading, or spread betting as it is also called, is a way of making money from the movement of stock prices whether they go up or down and tying up relatively little of your own capital. It only became popular in the nineties, probably due to both the Internet and the simplicity of spread trading. However, year by year it has grown in acceptance, while traditional stock trading has been languishing.
Since you only need a margin amount of the total value of the market exposure to open a spread trade, spread bets can be looked as a cheaper way to get started in trading. Some spread betting brokers require a deposit amount of only about £1,000. As long as you maintain your leverage exposure to a sensible level and don’t abuse leverage, spread bets can be an efficient entry into trading the markets.
When you opened a stock position via spread, you deposit a margin be it 5 – 10 – 20 or 40%. If the stock price goes up, all is well, very well. But when the shares plummet you could easily eat up your margin and more if the plunge is sudden.
Stock spread trading is available on a wide range of stocks, but not necessarily all of them. You need to check with your spread betting provider which shares he will take bets on, as some of the smaller companies may not be offered. To set against that potential disadvantage, spread betting companies can offer bets on shares in many markets, not just the local one such as the London Stock Exchange. This can be an advantage when one country’s economy is stagnant, as you are able to focus your attention in other directions.
When you spread bet on stocks, there are some differences that you need to bear in mind. First, you never own any stocks, all you do is bet on the price. This has two obvious results – first, you do not qualify to receive any dividends that are announced; but secondly, you do not have to pay stamp duty, and have on capital gains liabilities, as you are only betting on the value, and not investing as such.
There is another obvious difference you will see when you come to place a bet. There is a time period associated with every spread trading contract. Unlike stock trading, you do not buy and hold a spread bet for years, ignoring it except for passing it on in your will. This is because to qualify as a bet with the financial advantages that offers, as outlined above, there has to be an end date. In practice, you can “roll over” the bet, effectively closing one bet and taking out another, if you want to. But stock spread trading is more about making profits in the shorter term anyway.
Finally, if you have ever been scared of “shorting” a stock as many traders are, selling it before buying it in order to make a profit from a fall in value, then stock spread trading will put your mind at ease. As you are only betting on the change in value, it is just as easy to bet on a drop in price as on an increase, adding an important option to your repertoire.
So the spread betting account is the only place I have free cash at the moment. I was intending to treat the bet like a real purchase – cash covering the whole exposure, stops a long way off. But I hesitated. Now I wonder if it still might come back again before there is some news. If you are playing a share from say 15p, what size bet are you putting on that? (if you don’t mind saying!)
Do you mean spread bet wise? Assuming you do that one I went for £15 per point. It only closed on 13p as that is where I put my stop and it got hit on the retracement. I was going to go £20pp but decided to start with a much looser stop to give it a good chance, and hence with a wider stop and only wanting to risk the same amount I lowered my £pp. I quite often buy shares at a similar time to placing a bet, or bet on shares I own when I feel a surge is coming. I am working on the idea of only risking a small % on each bet. Although I tend to be more than discussed by Mr Prior. I usually risk 3-5% of my pot (and occasionally more if I researched well and not just a chart play).