Starters Guide

THE RISKS IN FINANCIAL SPREAD BETTING

Financial spread betting can be an exciting and worthwhile way to make returns, but it carries risks - and these are significant. Most experienced traders and investors have spread betting accounts on the side - but that does not mean they are suitable for all. 

Could I Be at Risk?

Yes - anyone who enters the financial spread betting market puts their capital at great risk. If you are a beginner to the investor and trading markets, financial spread betting may not be appropriate.

What are the Risks?

Similarly to CFDs, financial spread betting accounts are easy to use but carry with them the risk that you could lose all of your invested capital, and be required to pay additional funds in the event of a loss.

Spread betting is very similar to gambling. It is therefore important that you are familiar with the shares or indices you are betting on before you begin. Your potential losses may be far greater than your original bid.

Remember, markets are volatile so it can be tricky to predict which way a market may move.

What Do I Stand to Lose?

Financial spread betting exposes the trader to lose ALL the capital they invest. By taking a bet, you are speculating on the direction a market will take.

A spread betting company will offer you a spread. That means they are quoting you a buy and sell price on a share. You then decide an amount you wish to bet on - this can be as low as £1 but can be a much larger amount. You bet on which direction the movement of the spread price - so whether the market will rise or fall. Therefore, if your bet is incorrect, your loss can increase significantly if the markets move against you - ie if it does the opposite of what you bet.

The trader is buying or selling a financial product with much less money than its full market value - therefore, the leverage or gearing is the relation between the potential loss or profit against your initial deposit. The higher the leverage, the higher the risk to your money.

If you make a loss, you are liable to lose your entire deposit, but also larger additional losses on top of your initial deposit.

You may be required to fund an additional, much larger margin in order to maintain your position. If you close your bet at a loss, you are required to pay any deficit.

What Can I Do to Reduce Risk?

There are a number of ways in which you can reduce your risk exposure, but please remember none of these guarantee the safety of your capital. You could still lose a great deal of money.

Ways in which you can reduce risk include:

Add a Stop Loss

This means you place a stop limit on each account, which will close your trade at a pre-set level in the event that the price should move against you.

Practise and Research

Many spread betting firms offer a 'demo account'. This is a very useful tool, and allows the would-be investor to practise without actually investing. That way you can get an idea of how the system works and build up some confidence before entering the real market. Researching the market in advance is also highly recommended.

Seek Independent Financial Advice

Before entering the market, it is wise to seek independent financial advice. That way, you know you are receiving unbiased advice on whether you can afford to risk your capital by trading on the markets.

Financial spread betting is challenging and exciting, but can also become addictive. Make sure you only invest an amount you can afford to lose. While there are many who have made very good returns in spread betting, you stand to lose a lot of capital very  quickly.

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