We were told that the great recession of 2008 was a once-in-a-generation crisis. However, today’s cost-of-living crisis and a looming recession have brought economic concerns back to the forefront of many people.
With wages failing to keep up with inflation and many sectors cutting pensions, individuals are looking for ways to create a stable financial future. Investing in the stock market is the first way to create an additional income stream that many people consider, but often without weighing the risks.
Traditional investing isn’t for everyone. Younger generations are finding investment opportunities that are usually reserved for larger players who already have significant capital.
Even though we are moving towards digital options in most areas of life, investing in real assets is still a classic step. Real estate is the most obvious option, although the barrier to entry is quite high. Art and collectibles like stamps and coins are also top options. Other niche offerings, such as investing in cask whiskey, are also finding an audience.
The search for ways to play in the stock market that do not require large investments is also increasing. Lured by quick profits, many are turning to day trading – a high-stakes activity that many find appealing.
While day trading software has made this accessible to most, it still requires a significant investment. For example, in the United States, anyone who makes more than three trades every five days must have $25,000 in their account at all times. This rule doesn’t apply in the UK, but it shows how risky and volatile this type of trading can be and what kind of capital you need to lose comfortably.
However, there is a special way to speculate on daily market movements that attracts more risk-averse traders. Spread betting allows you to participate in day trading without actually buying shares. This article provides a brief overview of how spread betting works and why it’s an interesting alternative to traditional investing.
What is spread betting?
Spread betting is a method of speculating on daily market movements that does not require large investments to buy stocks. Instead, you are essentially betting on what the market will do.
When you select a stock or commodity to bet, the broker offers two prices. One of them — the bid price — is slightly higher than the stock’s actual current price. You buy at that price when you think the stock will appreciate in value. The other — the ask price — is slightly lower than the stock’s real price. You choose the ask price, also known as the ask price, when you think the stock will go down in value.
Instead of having to pay full price for a stock, buy in at a percentage of cost. This is the margin. Margins allow you to leverage a much larger position without investing all your money upfront. Margin trading is less expensive initially and then either magnifies your returns (hopefully) or your losses (unfortunately).
When you are ready to choose a broker to open a spread betting account, check out the margins they offer before signing up. Just like you browse sportsbook for the best odds, when you want to place a sports bet, doing some research is a smart move.
An added benefit of spread betting over traditional day trading is that any profits you make are not taxed. This can make a big difference in what you take home when trading significant amounts.
Ways to manage risk
Obviously the number one way to manage risk is to only place small, safe bets that you’re happy to cover in case they don’t work out. However, sometimes you want to have a little more fun in the market and be brave. Go big or go home isn’t exactly a sound investment strategy, but it can be very tempting at times.
Most spread betting brokers offer some tools to help you manage the level of risk you are exposed to. This includes standard stop-loss and/or guaranteed stop-loss orders. Both close your position at a set point. The difference between the two is that the standard stop-loss order is closed at the best available price below the price you set, while the guaranteed stop-loss order is closed at the exact price you set.
Along with a sensible spread betting strategy, both are good tools to keep you from throwing more money on losing positions, which is usually the case for the majority of inexperienced traders.
*Spreadbets and CFDs are complex instruments and carry a high risk of losing money quickly due to leverage. The vast majority of retail accounts lose money when spread betting and/or CFD trading. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
*Marketing for CFDs and spread betting is not intended for US residents as it is prohibited by US regulation.