Spread betting is a way to make money based on your knowledge of specific securities. In this way, it’s no different than trading stocks, but many investors don’t take part in spread betting. That may make sense for professional investors with 8 figure portfolios, but for the average investor, spread betting can be a great supplemental income source. Here’s how it all works.
What is Spread Betting?
So what is spread betting? If you’re unfamiliar with spread betting, it’s a pretty easy concept to understand with even a little bit of investment experience. In many ways, it’s similar to futures trading, where an investor selects a security that he thinks will change value in a certain way, at a certain time. The futures investor will decide to buy or sell at the end of that time, because of price changes he predicts in the meantime. He expects to earn a profit based on the value moving in his chosen direction.
Spread Betting is very similar, but unlike futures trading, there is no actual ownership of the stock, fund, commodity, etc. being bet upon. The spread better puts cash into a contract that lasts a certain amount of time (chosen by the investor). He also chooses whether he thinks the price will be above or below the “buy” and “ask” prices.
If, at the end of the chosen time, the price has moved in the chosen direction, the spread better gets a payout in proportion to the money put at stake as well as the distance the price changed in the predicted direction.
Why Does Investing Experience Help With Spread Betting?
As you can see, both futures trading (and many other investment forms) and spread betting are both based on knowledge about a specific security. In the case of futures trading, the investor has real ownership of the stocks involved, either to sell or buy. But with spread betting, no transaction of ownership occurs.
So while the fundamentals of these two actions are different, the motivations for taking part in them are, largely, the same. A good investor doesn’t invest in a stock, commodity, or whatever else without deep knowledge about the underlying value of that security. Investing in a stock that an investor has good reason to expect to grow is not a gamble. It’s a sober, educated investment decision.
A well-chosen investment decision will almost always translate into a good spread betting decision. If you are sure enough that a stock is going to gain value, why would you be any less ready to exploit that knowledge to your benefit with spread betting than with ownership? In fact, spread betting has an upside that makes it more appropriate in certain circumstances than ownership investing.
Beginning as a Spread Better
Spread betting requires much less startup capital than traditional investments. If you are convinced, for example, that Tesla is going to gain value tomorrow based on a new product revelation by Elon Musk, you’ll have to spend hundreds of dollars to buy even a single Tesla share in order to capitalize on that knowledge.
But with spread betting, you can start with much less cash. You don’t actually own the shares, you just make profit on correctly anticipating their future action. In this way, spread betting can be a great introduction to investment, a way to raise capital for traditional investing, a second income, or a way to double down on confident investment decisions you’ve made in other forums.
In the end, spread betting is as good a choice as you make it. If you take part in spread betting contracts with the forethought and peace of mind that characterize a strong investor, you should be as successful or more as that investor.