Depending on which spread betting company you choose, it’s possible to speculate on thousands of different markets such as commodities, forex, shares, bonds, interest rates and indices. Here, we look at what is involved in trading these various markets.
- Indices Trading
When people refer to “the markets”, usually it is an index they are referring to. Indices measure the changes observed in a particular selection of stocks which represent a specific market (or part of it). If you trade indices, you can speculate on the overall market’s performance and due to this, usually indices reflect the sentiment of investors about a certain region, sector or economy’s state.
If traders trade indices, they can develop a more diverse portfolio, profiting from either the contraction or growth of a number of industries worldwide. Even better, taking a broad view of several companies may also service to reduce the risks associated with trading separate individual shares.
Some of the most popular indices for trading include:
- The New York Stock Exchange
- The S&P 500 (made up of the USA’s 500 biggest companies)
- The Dow Jones Industrial Average (made up of the USA’s 30 most influenced and largest companies)
- The NASDAQ Composite Index (an exchange focused on technology)
- Nikkei 225
- FTSE 100
Although some investors like speculating on the stock market, others prefer the Forex (foreign exchange) market which allows for 24/5 trading and a higher liquidity. Let’s look at Forex trading next.
- Forex Trading
The Forex global market is the biggest financial market in the world, with up to $4 trillion of trades being placed each day. Forex trading refers to trading currency pairs to speculate which will go up in value when compared to the other. Open 24 hours, 5 days per week, the global Forex Market is very liquid and offers potential to achieve huge profits.
How do traders begin trading Forex? Firstly, it’s important to get to grips with the technical terms which are used.
- Currencies are always traded in pairs. The base currency is the first of the pair and the second is the quote or counter currency.
- Every Forex quote has two parts – the bid and the ask price. The term “bid” refers to the price which the broker will buy the base currency for in return for the chosen counter currency. The term “ask” refers to the price which the broker will sell the chosen base currency for in return for the chosen counter currency.
- The term “spread” refers to the difference between the ask and the bid and this determines the position’s cost to open.
- A major currency pair will be usually quoted to 4 decimal places. A pip or point is the final digit of this quote, so, if you were looking for a quote on EUR/USD and the bid price was 1.0661 and the ask price was 1.0664, there would be a spread of 3 pips. This cost must be redeemed from the traders’ profits and therefore the market must move favourably in order to just break even.
Are All Brokers The Same?
When you trade shares, the price is fixed, however this is not the case when trading currency pairs. Currency quotes will differ between the various brokers and banks. The reason for this is that Forex is an OTC (over the counter) market, with no physical point of central exchange. Therefore, it is not as regulated as the stock market. This allows brokers to offer an identical currency pair to two clients at a completely different price. Since there can be variations in bid-ask spreads between providers, you need to take the time to compare brokers before you commit to the one which offers you the optimal spreads to suit your trades.
Great For Those Who Prefer Late Nights
Forex trading enables investors to trade 24 hours a day, 5 days per week as there is no centralized physical exchange to have set closing hours. That means that when you are told the US$ closed at a certain rate, that rate refers to the time at which the New York stock market closed, but spread bettors and traders are still able to trade in Forex after the stock markets close, which is very difficult to trading shares.
If you’ve decided you want to trade in Forex, you need to be aware of the various terms which are used in this form of trading.
For example, if you trade a currency pair, one currency is long and the other is short. This means if you’re selling 100,000 units (standard lot) of EUR/USD, you are exchanging Euros (EUR) for Dollars (USD). The dollars are “long” and the Euros are “short” in this scenario.
It often helps when you think of some exchanges that you carry out every day. Imagine you have purchased 4 apples for £1 in a supermarket, you are then short £1, but long 4 apples. This principle also works when applied to Forex although there is no physical exchange.
Shorting The Euro Versus The US Dollar – A Case Study
The EUR/USD pairing is an especially popular currency pair among traders. Back in 2010, one trader made the decision to short their EUR/USD at the price of £1 per point. This means that his expectation was the Euro was going to drop in value. His bet was opened at $1.3780 but after he kept a close eye on the activity in the market and followed economic and political news around the world, he took the decision that he would close the trade in December at $1.3160.
Profit = (1.3780-1.3160) x £1 = £620
In this scenario, the trader profited by £620 – not at all bad in just a few months!
Which Currencies Am I Able To Trade?
Some of the world’s most popular currency pairs for trading include:
The above pairs together with their various combinations represent more than 95% of all speculative Forex trades. However, the major currency pairs are sold and purchased in huge volumes so their volatility is relatively low. This means that, depending on the strategy you choose to trade with, it will usually take longer to make a profit.
Why Is Volatility Important?
Many traders prefer trading in a more volatile market since there are usually greater price movements in any particular timeframe. This makes speculation more exciting. Should you want to try spread betting in more volatile conditions in an attempt to increase your profits, you may prefer exotic currency pairs, however you need to take the time to review different providers before you open an account since usually only the biggest providers offer a decent selection of exotic currency pairs.
Not Just Any Pair
When it comes to trading exotic currency pairs, here is some important information.
Exotic pairs comprise a major currency which is paired with a currency from a smaller or emerging economy. The spreads on these currencies generally are quite narrow since they are sold and bough in large volumes. Singapore and Hong Kong’s currencies as well as those from European nations from out of the Eurozone, currencies from other areas within Asia, Africa, the Middle East and Africa are all considered to be exotics.
As the financial, economic and political environment for these emerging and smaller economies change rapidly, this can affect their currency values significantly. The result is that exotic pairs usually make larger and faster moves which makes Forex trading more fast paced and exciting. As it also represents a 24-hour trading opportunity, exotic currencies are also appealing to traders who want to respond immediately to any urgent or relevant news. In areas where currencies are greatly affected by financial and political events, there is a strong influence on the commodities market by supply and demand. Next, we look at commodities, and why they are so interesting to traders.
- Commodities Trading
A commodity is a tradable raw material or a primary agricultural product. The commodities which are most commonly traded include precious metals like gold and silver, agricultural products like beef, sugar, coffee, barley, gas and oil.
There are several ways of classifying commodities. A soft commodity is one which is bred or grown (like oats or cattle) while a hard commodity is one which is extracted such as aluminium or copper. Sometimes, commodities are classified in categories of:
- Energy – gasoline, heating oil, natural gas and oil
- Metals – aluminium, platinum, copper, gold and silver
- Agriculture – sugar, wheat, rice, cocoa and coffee
- Livestock and Meat – feeder and live cattle
Usually, commodity trades are carried out via futures contracts on an exchange which standardises the minimum quality and quantity of the communities being traded. As a future is a contract to sell or buy the asset, should the trader fail to close their position before it expires, a large delivery of a commodity that the trader neither wants or needs could end up being the result.
When you’re a spread bettor, however, you won’t need to worry about this eventuality. You are just speculating on the asset’s movement, not actually purchasing the future. Your provider, however, will always ensure that the situation never occurs by closing the trade before it expires.
Typically, the commodity market follows supply & demand, with lower supply leading to a higher price. The price of commodities can be affected by numerous elements including weather patterns, advances in technology, wars, health epidemics and developments in the global economy.
Before investing in a commodity, ask yourself the following questions:
- Which country has the biggest supply of this commodity?
- Which countries or sectors are the commodity’s major consumers?
- Is that country stable politically? Is it especially vulnerable to turmoil?
- How much of the commodity is produced ever year/quarter/month/day?
- What are the main uses of the commodity?
- Does it have an alternative which could have an effect on its value?
- Could it be affected by any seasonal factors?
Safe Haven Investment
Investors use some commodities as a safe haven investment – a security which retains its value even when the market is very volatile. A lot of traders try to reduce risks if the markets are turbulent by choosing to invest in a safe haven security.
One key example is gold. Gold is often believed to be one of the safest investments since it generally retains value even if there is a stock market crash. Typically, gold’s prices actually rise if interest rates or share prices fall as investors seek it out as a shelter in a tough time.
But what about shares? What do you need to know about spread betting and shares? Read on to find out.
- Share Trading
A share is a piece of a company ownership which may be purchased and sold via financial stock markets such as the New York or London stock exchanges. The value of shares is determined by supply & demand, and this can be primarily affected by the performance (or the perceived performance) of the company by its investors. If the company, for example, reports to its investors that they have had an especially successful quarter, their share prices usually rise. But if the same company issues profit warnings, or is implicated as being involved in some kind of scandal, it’s likely their share price will fall.
As every share belongs to one specific company instead of being focused on the economic status of a country or whole industry (as is the case if you choose to spread bet on Forex or indices), when you trade shares it’s possible to research in a more focused way about the company which you believe will increase its value.
Spread betting will give traders the ability to trade on many thousands of different shares across a variety of shares markets around the globe. You can source information and carry out research at News.Markets which provides plenty of useful information, as well as on the Citywire and BBC Market Data pages. Reuters is one further useful site that offers traders the most up to date investing and financial news together with stock quotes and data on a broad spectrum of businesses.
A Successful Trade – Go Long On Google
Back in 2004, Google was floated on the stock market, with its shares selling for $85 each. Quickly, however, those shares increased in price. One amateur trader decided to benefit from this and opened their trade, buying for £1 a point at $99.
Around one year later, a review of her account revealed that the trader had made a profit of an amazing £20,000. Believing that there had been some kind of mistake, she immediately contacted the customer support team at her broker, however the price of Google shares had actually climbed as high as $300, increasing at £1 a point by around 20,000 cents!
- Bond Trading
A bond is an interest or debt bearing instrument which can be traded and represent one way for governments and companies to raise sufficient money so that they are able to pay for their investments.
Should any future change to long term rate of interest be something that interests you, it could be worth trying to speculate on bonds. A lot of investors choose to include bonds in their investment portfolio since they have a reputation for stability and safety when compared to stock market trades. Some investors also choose to trade in bonds as a way of hedging against any pre-existing government bond holdings.
The majority of providers will offer a good selection of government bonds from around the glove for investors to try speculating on. Usually, these include all of the main categories of international bonds like 10 Year Treasury Notes, U.S. Treasury Bonds and UK Gilts.
Also in our ultimate guide to spread betting, it covers:
- Ten Good Reasons To Try Spread Betting
- The Potential Risks
- Making A First Trade
- Positive Thinking – Going Long
- Going Short – Winning A Trade From A Falling Market
- Spread Betting’s Hidden Costs
- Choosing The Right Provider Of Spread Betting Services
- Glossary Of Spread Betting Terms
- Compare spread betting brokers, features, accounts and markets