Hedging your Bets with Financial Spread Betting
It may seem surprising, but spread betting is sometimes done to lower risks rather than take them on. This is called hedging. Hedging your bets with financial spread betting can be done any time you want to minimize potential losses from other financial activity.
You will likely want to hedge against losses if you own stock, mutual fund shares, commodities, foreign currency or other valuables known to fluctuate in price. Usually, if you expect the value of these instruments to drop, you would have to sell in order to stop your losses. If you do that, however, you may find that restoring your position requires buying the instruments back at a higher price. You'll also incur brokerage fees for both selling and buying. Spread betting isn't just for professional traders and major investors. Regular people can benefit greatly from successful spread bets. Someone going overseas on vacation, for example, can hedge against adverse changes to exchange rates between the pound and the currency of the destination country.
Spread Betting Explained
Spread betting is a way to profit on fluctuating prices without having to buy or sell the actual stock or items involved. Spread betting companies list the buy and sell prices for various financial instruments. If, after analysis, you believe a particular instrument will rise in price, you place an up bet and open your trade at the buy price. If you think the instrument's value will drop, you place a down bet and open at the sell price. To close the trade, you deal at the opposite price you opened with. There is usually no set time limit for closing trades. The spread betting company's quoted prices will change as the market prices do, so they usually will not be the same as when you opened your trade.
Your profit or loss isn't simply calculated by the amount and direction the stock has changed. You bet a certain amount of money on each point of change. For example, if you've bet five pounds per point on a stock rising and it goes up 10 points, you make 50 pounds. On the other hand, if it goes down 10 points you lose 50 pounds instead. You decide how much to bet per point, which gives you some control over the amount of exposure you face.
What makes spread betting a good method of hedging is the fact that betters can retain ownership of their financial instruments even while making adjustments for expected changes in value. This allows for fast trading without the expense of brokerage fees and certain taxes.
Like any form of betting, there is the possibility of loss when hedging using this method. Betting on the value of stocks and other forms of financial instruments is just as much a form of gambling as any other type. There is the possibility of gaining from the entire price movement, but there is also the chance of losing the entire value of a price movement. Therefore, spread betters should never risk more than they can afford to lose. Even so, many people find it exhilarating and do well with hedging via spread betting.
Michael knows a thing or two about financial spread betting after 5 years in the industry. He likes to care and share when it comes to tips. If you use these tips to make some serious money, buy him a beer.
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