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Spread betting is a high risk, high reward form of speculating on the financial markets. The best spread betting brokers in the UK are heavily regulated by the FCA and have to comply with. There are more rules than any other industry designed to protect clients. Every financial promotion you see is littered with risk warning and disclaimers, urging prospective traders to understand the risks before trading.
It’s is possible to make huge profits, with a small stake in a short amount of time using spread betting. If you call the market right and have a good spread betting strategy there is money to be made.
But, in the spirit of balance, here are 5 reasons you shouldn’t be spread betting at all. Spread betting isn’t investing, it’s a very high-risk form of leveraged speculation (no matter how you dress it up).
You’re too inexperienced to spread bet.
There is no doubt that spread betting is one of the easiest ways to trade the financial markets. It takes only a few minutes to open an account and there a load of spread betting brokers to choose from (see the top ten spread betting brokers here). But being easy to trade is not the same as easy to make money.
If you’ve never invested before, bought a share in a company or done some form of currency conversion then don’t spread bet. You simply don’t have the experience to make any money. As a leveraged product spread betting was initially set up for professional trades with years of experience in traditional investing products.
You don’t have enough money for spread betting
You should only really be spread betting with around 10% of your investment portfolio. This makes it part of balanced risk diversification. Meaning, spread betting is very high risk, shares, bonds and funds are lower risk so should form a larger part of your portfolio.
If you only have £10,000 to invest and put it all into spread betting, it’s a mistake. You may get lucky and have some winning trades but it is a very high-risk investment strategy. Also, one of the key errors new traders make is they put all their capital in one trade and don’t have enough wiggle room for variation margin. Variation margin is the amount added or subtracted from your account on a daily basis to cover your profit and loss. If you don’t have enough spare cash, you won’t be able to top up your account to cover a running loss.
You don’t have a spread betting strategy
If you don’t have a spread betting strategy you won’t make money plain and simple. This takes, time, money, education and experience.
It seems like a bit of a Catch-22 in that you don’t get experience unless you trade, so it pays dividends to start small and diversify across spread betting brokers. Ideally you can to be market natural and hedge equity spread positions with index and currency trades so you don’t get knocked by a shock big move.
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Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.