The Basics of Spread Betting Explained

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Spread betting can be a powerful way to increase the diversification of your side hustle and earn a significant amount of money without necessarily being concerned about market conditions. Whether a bullish or bearish sentiment dominates, this independent tool is indeed worth a second look. So, what are the basic mechanics behind spread betting? Also, how can you capitalize on even the smallest of movements and why are the spreads associated with a certain asset important? We should peruse each of these topics in greater detail.

 

Spread Betting Defined

The underlying feature of spread betting (as it hints) is associated with the speculation that the price of a certain asset will rise or fall within a given period of time. Some areas associated with this type of trading include indices, treasuries, bonds and commodities. Even if the markets fall, a correct price prediction will garner a profit. The more the price moves in a specific direction, the higher the level of profit will be enjoyed.

 

Going Long and Going Short

“Long” and “short” are common terms associated with a spread bet. These are the financial equivalents of buying and selling. Each can be defined briefly as:

 

  • A long (buy) position will cause a profit if the price of the asset rises.
  • A short (sell) position provides a profit if the price of the asset falls.

 

Having seen these two scenarios, it should be apparent that losses can also occur. If the price of a long position falls, the investor will lose money. On the contrary, if a short position rises, the trader will once again be “in the red”.

 

The Spread Itself

When trading with brokers such as CMC Markets, this type of instrument is provided with the spread itself. The spread represents the real-time value of the buy and sell (long and short) positions of a specific asset. Tighter spreads are very important.

A tight spread (as low as 0.7 pips through CMC Markets) enables traders to maximize their profits within a short period of time without becoming exposed to a considerable amount of risk. Wider spreads will naturally take longer to be realized an in turn, losses could mount. It is critical to seek the tightest spreads possible.

 

Mitigating Risk

While spread betting is independent of prevailing market conditions, this method is still associated with a certain amount of volatility. Thus, it may be wise to spread bet within multiple sectors. An example can be a position within indices. It could be easier to predict short- to medium-term movements within an index as opposed to wagering on an equity or stock alone. This is ultimately associated with the discretion of the investor.

To better understand the principles and advantages of spread betting, it is wise to peruse the dedicated section found within CMC Markets. An astute grasp of spread betting can add to the diversity of one’s methods and when embraced with prudence, financial rewards can be a very real possibility.

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