Trading without Leverage

Spread bets permit traders and investors to profit from the price movements of a wide range of different markets including shares, indices, currencies and commodities. They are very cost-effective and as they are traded on margin which means that they can very well help you make great returns on your capital, although this inevitably entails a higher degree of risk.

Jones told me the average IG account is just under £1k. If 100% of £1k accounts are betting in the same direction and leveraged up to their necks using no risk or money management rules, they will all go rushing for the door at the same time, the early 10% will close out the leverage and snowball the price in the opposite direction and the 90% take big losses because they get shafted by too many poorly managed leveraged accounts all betting in the same direction. It brings us back to the importance of risk and money management over the importance of punters long or short views.

Spread bets being margin traded instruments means that while returns from this form of trading could be greatly amplified this is also a double-edge sword and there is potential for equally significant losses which could even exceed your initial deposit.

Having said that, you can structure a spread bet without leverage…if you were UK based and thought let’s say a stock was going to go to £10 from 313p over a year it could be well worth looking at switching to synthetic with a good spread betting house. If you choose carefully, so downside is limited, the risk/reward can be good. And this would avoid you having to pay tax.

Let’s take into PDX stock. At present you can buy 1000 shares for an outlay of about £1000.

You open an account – ship in the £1000 and buy 1000 pdx

They can go down 20% before you will get a margin call – you might think that is safe – or you might only buy 800 shares [still more than the £1k would let you buy in real shares] and leave the rest in cash to cover any slippage in the price.

You can set a stop loss whereby the shares are automatically sold at a given price so you can manage the downside risk that way too – and sleep

As they go up you are getting the profit on the extra shares – not bad if you are a believer.

I think in reality i should have a 50/50 split and i think of moving to that.

Because of course one of the advantages of spread bets is that they enable you to make the same profit for less outlay – or put another way if you have £1k to invest you can buy 300 pdx shares for real or 1000 on a spread bet.

You get the same profit [ minus expenses] and on spread bets you even get the dividend

The real interest though is in shares [or commodities like gold ] with 5% margin [where you only pay 5% of the real cost]

There you can easily double your money very quickly – or lose double your stake of course…

The assumption that spreadbetting has to involve a greater risk than share ownership is incorrect. It only has more risk if you want it too. So it is not be careful of spreadbetting per se, but be careful of how you use it. This morning, many people will drive to work. We don’t go around saying beware of cars all the time simply because it is possible to try and drive through a city at 150 miles an air. Beware of breathing! That’s another one.

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