Financial spread betting is extremely risky and you should always check and ensure that you understand the risks before hand. With any Financial Spread Betting system it is possible to lose more than your initial stake. Please do not make any trading and investment decisions based upon what you read from this Financial Spread Betting Information Blog.
These are relatively new to financial spread betting. They are very similar to fixed odds betting you have in sports in that you know how much you will win or lose before you initiate the bet.
The number of markets that you can make binary bets on is limited compared to that of other Financial Spread Betting markets but in recent years that number has been increasing. The most popular market for binary bets is probably indices.
Binary bets are very short term usually lasting a day at most. There are usually only two outcomes so you are either right or you are wrong. It doesn’t matter how right you are or how wrong you are, all that counts is the overall outcome.
I will explain by the way of example… the FTSE100 is trading up so far in the session and you are confident that it will be up at the end of the day. You have no idea how much it will be up, you don’t care as long as it finishes up. In fact, it can fall from the point where it is now as long but as long as it finishes in positive territory at the end of the day you will win the bet.
So in the above example you want to place a binary bet on the FTSE100 finishing up. You go to your financial spread betting account to get a quote for that bet. You are quoted 60 – 55. This means that if you place a bet of £1 and you win (i.e. FTSE finishes positive), then the amount that you win will be £40 (= (100 – 60) *
£1).
If the FTSE doesn’t finish up then you lose your bet and you lose £60 (= (0 – 60) * £1).
The reason that I think the binary bet is becoming more popular in financial spread betting circles is because of its transparency. You know what you will win or lose at the start of the bet.
They are great short term trading instruments and as you can imagine, the prices move throughout the day so you can even trade out of your bet before the end point.
Example continued…
We might have placed the above bet in the morning of a trading day. As the day goes on, even if the value of the FTSE doesn’t really move, then the price trade is likely to go in our favour as there is less time (and therefore less news likely to emerge) for the situation to change. In this situation you could trade out of the bet before the day’s end at a profit.
The disadvantage of binary bets is that they aren’t currently regulated by the FSA. This may change in the future as more financial spread betting is done this way.
Binary betting can be a little frustrating and conversely a great relief. Imaging putting the above bet on and you were right. Not only were you right, you were very right. The market rallied to a record day. You would still only win your £40.
Looking at it the other way though. Imagine you were wrong, very wrong… the market tanked. You will be grateful to know you still only lost your £60.
Welcome to the first in a series of short articles about the different type of bets you can make while financial spread betting.
The first is an introduction to futures. This used to be the most popular method used by traders (in fact it used to be the only way). Over recent years it has declined in popularity slightly due to the rise of other different types of bets available.
So how do futures work? Well the initial concept was invented centuries ago as a way of protecting the purchaser and the seller from volatility in the spot price. The spot price is the current market price.
By taking out a futures contract you knew the price that you were going to pay for a particular commodity many months in advance.
Then traders started to enter the market as it allows them access to different types of classes of assets without having to take delivery of the physical asset. This market still exists to this day and you can take advantage of it through financial spread betting.
So how are the futures prices determined? Well as you can imagine that the spot price is a major factor of valuing the futures contract. If the spot price is higher then futures price is likely to be higher too. As well as the spot price you need to consider the ‘cost of carry’.
As you aren’t paying the full amount up front, you only pay the margin requirement, the current interest rate is a determining factor of the futures price. The higher interest rate, the higher the price of the futures contract.
Specifically in the case of stocks, any potential dividend payment affects the price and if you are going long (buying) you can get the contract at a better (cheaper) price.
As with anything financial spread betting related there is a spread. You need to consider the spread of the futures market as well as that added by your Financial Spread Betting company.
The next article will be a brief introduction to binary bets.
I just wanted to do a quick note explaining why it can be useful to have more than one account when you are financial spread betting.
When you think about it, there are a number of reasons to consider adding a second.
Firstly you have a backup. What would you do if your account was down and you needed to initiate a trade? Yes you could phone them but my preference is to have a back up account.
Different accounts may have different specialisms. You may have preferences for 2 different types of bets, binary bet and rolling daily bets. There may be one financial spread betting company you like for the rolling daily but their range of markets for the binary bet may be limited so you may want to split your account in two.
Even when firms cover the same markets their spreads may differ. When you are financial spread betting you want access to the tightest spreads. With 2 accounts, you can have both open on screen at the same time and choose the trade with the tightest spread.
This won’t be a concern for most but government backs the first £50,000 if the institution goes bust. If you have more than that then you should really consider spreading it across multiple accounts.
A further reason for trying a second account is that you will see how good yours really is. Running two side by side shouldn’t really cause you any additional administrative problems and it will be useful to make sure that you have the best one.
With Financial Spread Betting there are often incentives for you to open a new account. Incentives can include cashback, tighter spreads for a limited time and even offers of wine and champagne. Always keep an eye out for these offers and take advantage while you can.
As with any account (like a bank account) it is important to review it against the competitors. How many of you still have the same account as when you started financial spread betting? Many of you I expect.
Many accounts attract new customers by offering benefits for a limited time. Make sure that yours is still up to scratch by doing a review at least every quarter.
Before that you start financial spread betting you need to open an account. There are so many different types of accounts these days for you to choose from. The great advantage that has arisen for us as a result of all these new accounts is that this increased the level of competition has given us better trading facilities at better prices.
That is great news for us financial spread betters because there are many more products being available, the size of the spreads being reduced, the websites being improved and the level of customer service increasing.
Because there are more accounts sometimes people (especially newbies) feel a bit overwhelmed when it comes to choosing a financial spread betting account.
It is important to remember that the account that you choose doesn’t have to be forever – you are not marrying it! You can always change your mind. With that said though, here are some things you may want to take into account when choosing your account.
Practice accounts
If you are new to financial spread betting then I would recommend that you start off by paper trading. There are many companies who offer this type service.
I would start by putting the actual amount of capital that are going to risk into the dummy account and practice for a while first. Please note that you will encounter many more emotions when you trade for real.
Customer services
Another important factor to me is customer service. When I want Financial Spread Betting Information, I want to call or email the firm and for them to deal with it promptly and competently.
But how can you test this before you open your account? Well phone them up to ask them for their new account literature. As a potential new customer it will be the best they treat anyone so if you aren’t happy with that service then maybe they aren’t the right company for you.
You can also check out different financial spread betting forums and review sites. The problem with forum sites is that often more people complain than compliment. It is probably a good idea to start your own thread asking people to recommend their current financial spread betting firm. Many people will be willing to share this information with you.
Be careful of review sites. Often the reviewer hasn’t used the account but will get a referral fee for referring you. It is good to check that the person recommending the account has actually experienced it firsthand.
Good value
Like anything I want a company that offers great value. As you know in financial spread betting you don’t pay commission. The broker makes their money from the size of the spread. It is useful to compare a few different brokers to compare their spreads. This is way it may be useful to open more than one account (more on this later).
Style of bets
You will need to check either the literature that you requested or the web to ensure that the financial spread betting broker offer the style of bets you want for example (rolling daily bets). If they don’t then they are obviously a no go. With the level of competition these days most offer a variety of products but not all companies off everything you may want.
Ranges of accounts
Some financial spread betting companies offer different types of accounts. This is different to the style of bets mentioned above. Often the style of bets will be the same, it is just the accounts are usually designed for different people.
Who they are designed for depends on the firm but some are usually more for the experienced trader and others for the newbie. Often it is difficult, especially when you are new, to know which is the best account for you. If there is a financial spread betting account offering credit then chances are they are for the more experienced trader.
If you are unsure then give the company a call to ask which is best for your circumstances (another way to test out their customer service!).
Minimum capital requirements
These are generally quite low but when you are starting out the amount of capital that you need to put into your account to begin with can make a difference.
I remember that I quite liked the look of one account when I started as I was using their training/dummy account. I wanted to open an actual trading account but their minimum was more that I wanted to risk at the time.
Often you can get around this rule by putting the money into the account to satisfy the requirement but don’t actually use it. Then you just need to be careful of the minimum bet size…
Minimum bet size
This will be an important criterion when you are starting out in financial spread betting. The bet size determines how much you are risking. It is really important that in the early days you aren’t risking too much.
When I started this was probably my most important criterion. I wanted to risk as little as possible per trade. When I talk about the minimum bet size I am really talking about the stake/bet per point.
The competition has reduced the minimum bet size over the years and it still continues to fall.
Extra functionality of the account
Does the account give you are the extra functions that you desire?
In Financial Spread Betting it is important to have stop losses. Does the account offer automatic stop losses (a must in my opinion)? Does it guarantee stops? If yes, at what price? Can you do contingent orders?
Set the minimum extra requirements you need in your mind beforehand and make sure your account ticks each one off.
What are their margin requirements?
Different accounts often have different margin requirements. As you know, with financial spread betting you trade on a margin, the size of the margin determines your level of leverage and the amount of deposit required.
Can you trade over phone if not able to trade online?
Although most of financial spread betting is done on the internet these days. Sometimes you may be required to telephone an offer through. Does the company allow that? At what cost?
Software
It is important that you can use the software that you get for managing your account. Even if you use separate software to do your analysis, you need the software to actually make your trade to work and work well. In financial spread betting we often have to make quick decisions and need the correct tools to do so.
It is often difficult to test this before opening your account. Dummy or practice accounts often don’t run on the same systems as the live accounts so sometimes this isn’t the best indicator.
As with customer service, you could check out others’ opinions in forums (bearing in mind they are more likely to report negative experiences).
Additional support
Is there any additional support like training? Do they offer courses? Run seminars? Not essential but nice to have.
Free incentives
Accounts often have freebies or cashback to entice you. While you shouldn’t use this as your criterion for you long term account, it may be worth opening an additional account to take advantage of the offer. Sometimes it is nice to open a free bottle of champagne!
More than one account
I mentioned that you might want more than one financial spread betting account. This blog post has gone on longer than I initially planned so more on that next time.
There are many reasons why financial spread betting is a great way to trade online. The first is that it is simple to learn. It may not look like it when you first start but once you get going it is really easy to understand the mechanics behind it.
You also don’t need a lot of money to get going with it. Because you trade on a margin you don’t need a substantial deposit in your financial spread betting account. This does make it risky which I will come onto later.
There are many different markets that you can trade in and better still you can trade them all from the same account. This means that you can quickly and easily switch from gold to shares in BP for example. The principles of financial spread betting work the same way in all the markets so switch between them is simple.
You can use Financial Spread Betting to go short on any particular market or asset. This is a great way of making money in a bear market when everyone is panicking but it is also great for hedging your other long investments. Say if you are long on a particular asset but didn’t want to sell for tax reasons but you felt quite bearish about it, you could go short on it and cover yourself.
And if you made a profit, well there is no tax to pay. There is no tax to pay on profits and there is no stamp duty to pay. This is the great advantage of financial spread betting as it means that your profits will be that much bigger.
You also don’t have to pay commission to the financial spread betting company. They make their money through the size of the spreads on a particular trade. So if you are looking for value for money look out for a tighter spread.
Financial spread betting is risky because it uses leverage. If you do use it right then it is a great advantage. Use it incorrectly and you could end up in serious trouble. You can lose more than your initial deposit so make sure that you fully understand the risks before you start.