As a money-smart investor, you will undoubtedly have heard something of financial spread betting (FSB). FSB may promise an easy route to short-term returns, but without a solid, strategic understanding, those potential returns are likely to be elusive at best. FSB can be rewarding and it can be tremendously exciting, but it does require some thorough research. Here are some preliminary pointers.
As provided by the likes of the City of London-based Trade fair, FSB enables private individuals to enjoy the same market-trading opportunities as the professionals, but at a fraction of the cost. It is certainly not risk-free – far from it – but it does offer a means to trade in derivatives of the world’s leading stocks, shares, currencies and commodities.
There are number of books and websites devoted to the strategic complexities of making FSB viable as a form of investment. It originated out of a hybrid between the City’s trading rooms and the sports betting industry. On that basis the recreational emphasis of FSB ought to be kept in mind. It is possible for serious traders to use FSB as an alternative investment strategy to direct market involvement – lack of fees and no liability to Capital Gains Tax offer self-evident incentives – but this is not recommended for anyone taking their first steps in this direction.
Rather than actually effecting a purchase, the ‘investor’ places a bet on the direction of movement of the stock. In what equates to a contract for difference, any subsequent price movement will either generate a profit or a loss on the trade. The trader him / herself decides when to close the position.
Such an open-ended exposure can be alarmingly expensive if sensible precautions are not taken. This is why trades tend to be turned around in a matter of minutes. With no dividend to consider there is not long-term benefit to any longer-term logic.
The first and most fundamental piece of advice, therefore, is to fully appreciate the extent of any potential exposure and to keep it permanently in mind. Automated stop-loss functions are built into the trading desktop software – some organizations make their use mandatory – and there is every reason to use them. FSB is not an environment where anything should be taken for granted.
From the investors’ perspective, FSB rewards market knowledge. It makes sense, therefore, to restrict the number and range of markets in which you trade. Being a master of one market area is all that is required to trade successfully. Partial knowledge (which is to say imperfect knowledge) can be dangerous.
That level of knowledge is as important in determining when to open a position as it is in deciding when to close it. Providers like Tradefair offer an extensive array of historical market charts that can show moving averages or the high or low price of the last number of bars. What is less easily grasped is the level of self-knowledge that is required to use FSB effectively. Self-discipline is a prerequisite. Knowing how liable one is to lose that self-control is an important part of the equation. Positions can shift quite rapidly in FSB and whilst that can be tremendously exciting, it can also be a stringent test of resolve.
FSB does provide the means to start to play with and enjoy your financial insight and awareness, but it is certainly not inconsequential. There tend to be ‘dummy’ or demonstration packages available on the bigger sites and it is strongly recommended that these are explored as a preliminary step. They are free to use 24/7, risk free and – as this correspondent can personally attest – a fascinating way to enhance your investment options. It makes for a thoroughly enjoyable research experience.