What is Spread Trading?
Spread trading is also known as spread betting. It is arguably the most straightforward method of speculating on financial markets such as stock indices, shares, commodities, and Forex, all from a single account.
3 key features of spread trading
There are 3 key features of spread trading...
1: Spread trading gives you the opportunity to profit from the rise, or fall, in the price of a financial instrument. This could be on a stock index, for instance, a currency pair or the price of gold.
2: With spread trading, you deposit a small percentage of the total value of your trade to control all of it. This means you’re trading with leverage.
3: You can also trade in a size that suits your risk appetite, something that isn’t always possible when using other financial products.
Some additional features
At Trade Nation you have access to a huge range of markets from one single account. This gives you full control of your own trading from our easy-to-use platform.
The costs are transparent. There are no commissions or fees to pay. At Trade Nation we make money from the difference between the buying and selling prices of each product. This is called the spread. Unlike many other providers, our spreads don’t increase just because markets get volatile. This is important as low fixed spreads help keep your dealing costs down and so maximise the returns from your trading.
What is a spread?
In all types of trading there are always two prices on show: the first, and lower one, is the price at which you can sell, or ‘bid’. The second, and higher one is the price at which you can buy, or ‘offer’. As we wrote above, the difference between these two prices is known as the ‘spread’, and the smaller the spread the cheaper it is for you to trade.
Spreads can be fixed or variable, and at Trade Nation our spreads are fixed. You will often see companies claiming ‘tight spreads’ which suggests that their dealing costs are low. However, they will qualify this by writing ‘spreads from…’
This means that their spreads are variable and will rise sharply when market volatility increases. This is what happens when economic numbers are released, or on unexpected news announcements. In contrast, having fixed spreads as we do at Trade Nation means they don’t increase in times of heightened volatility. We offer some of the tightest fixed spreads in the market which means you can benefit from low-cost dealing. In addition, you will always have the assurance of knowing what the Trade Nation spread will be at all times. With a variable spread, you have no control over the price, and it may be at its widest when you need to close a trade.
What is trading on margin?
With spread trading, you only have to put down a small percentage of the underlying value of a trade to control all of it. This is called trading on margin. As an example, let's say that we have a margin requirement on a particular market of 1%. This means you only have to deposit ‘margin’ of $20 in your account to control $2,000-worth of that market. So, there’s the potential for making large profits for a modest outlay. But there’s a corresponding risk of suffering a large loss if things don’t work out as planned. Given this, and that even the best traders will lose at least some of the time, it’s vital to pay attention to risk management.
What are the risks of spread trading?
Spread trading offers opportunities to make profits, but there are risks. Not just from incorrectly predicting which way a market will move, but also because spread trading employs leverage.
But don’t fear risk, understand it. Then you can control it.
Understanding these risks and developing suitable strategies with which to offset them is essential if you are to have a long and successful trading career.
As spread trades are leveraged products, it’s important to assess your risk appetite and consider using our Risk Management tools to protect yourself if a market moves against you.
Some markets fluctuate more wildly than others. But all have the potential to move sharply, especially following economic announcements or on unexpected news. It is important to research and understand the possible volatility of a market before you trade so that you can tailor the size of your trade to match your risk appetite.
Gapping, also known as ‘slippage’, describes a price movement in which no trade occurs. This could be caused by anything that changes the price of a market. For instance, unexpectedly bad, or good news about a company, a natural disaster or a major political event. Typically, a gap in price takes place between the closing and reopening of a market. But it can also happen when markets are actively trading. It is important to understand that a gap in the market can adversely affect your trading. So make sure you don’t take on excessive risk. For more on gapping and slippage, see our in-depth blog here.
In summary, spread trading is a straightforward method of speculating on fast-moving financial markets. It involves leverage where you can control a large position through a relatively modest deposit. As a consequence, it’s important to carry out careful and disciplined risk and money management and to make sure that you never speculate with money you can’t afford to lose.