Spread betting is a high-risk, high-reward form of speculating on the financial markets and as such the best spread betting brokers in the UK are heavily regulated by the FCA and have to comply with lots of capital requirements and treating customers fairly rules (like best execution). There are more rules than almost any other industry designed to protect spread betting traders. Plus every financial promotion you see is littered with risk warnings and disclaimers, urging prospective traders to fully understand the risks before trading.
But many do not, and this is a big problem if you are spread betting on the financial markets.
It 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.
However, it’s not for everyone and whilst I personally enjoy spread betting (particulary tax-free profits) in the spirit of balance, here are three reasons you shouldn’t be spread betting at all.
You’re too inexperienced to spread bet.
Spread betting isn’t investing, it’s a very high-risk form of leveraged speculation (no matter how you dress it up).
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 are lots of spread betting brokers to choose from (see the top ten spread betting brokers here). But, a market 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.
If you are new to investing you are much better of starting with a lower-risk investing platform like Hargreaves Lansdown, AJ Bell or Interactive Investors.
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. Spread betting currencies, indices, commodities and even stocks on leverage is very high risk
But, buying shares, bonds, and funds outright is less risky as any losses are not multiplied so they should form a larger part of your long-term 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. Developing a winning spread betting strategy takes time, money, education and experience. And I’m afraid to say that some people not matter how hard they try will never have the discipline or the intelligence to maintain one.
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 lots of different asset classes.
Ideally, if you are starting to trade, try and be market natural and hedge equity spread positions with index and currency trades so you don’t get knocked by a shock big move.
Richard is the founder of the Good Money Guide (formerly Good Broker Guide), one of the original investment comparison sites established in 2015. With a career spanning two decades as a broker, he brings extensive expertise and knowledge to the financial landscape.
Having worked as a broker at Investors Intelligence and a multi-asset derivatives broker at MF Global (Man Financial), Richard has acquired substantial experience in the industry. His career began as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson), following internships on the NYMEX oil trading floor in New York and London IPE in 2001 and 2000.
Richard’s contributions and expertise have been recognized by respected publications such as The Sunday Times, BusinessInsider, Yahoo Finance, BusinessNews.org.uk, Master Investor, Wealth Briefing, iNews, and The FT, among many others.
Under Richard’s leadership, the Good Money Guide has evolved into a valuable destination for comprehensive information and expert guidance, specialising in trading, investment, and currency exchange. His commitment to delivering high-quality insights has solidified the Good Money Guide’s standing as a well-respected resource for both customers and industry colleagues.
You can contact Richard at richard@goodmoneyguide.com
