Is Spread Betting Safe?
Think of spread betting as being like driving. Yes there are risks and you have to learn the rules of the road and apply a certain amount of intelligence and discipline in order to avoid nasty accidents. If you are reckless behind the wheel of a car you stand to lose your life. With spread betting if you are reckless it is your savings that are at risk. But like driving, when practiced responsibly spread betting can be liberating - as for many it is an independent source of income.
Spread betting firms are closely monitored by the FSA and on occasions fined for not making crystal clear to new customers the risks involved. They are bound by regulations to make sure that everyone who opens an account is aware of the potential hazards. So if you sign up for an account expect to receive a lot of material outlining the dangers.
Protecting yourself from unnecessary losses is not actually that difficult. Here are some guidelines to help you:
- Always set a stop loss. Setting a spread betting stop insures that if markets turn against you your losses are limited to the amount you choose in setting your stop order.
- For extra security consider setting a guaranteed stop. A spread betting guaranteed stop insures that if the broker can't for any reason close your bet then they will bear these losses.
- Don't over-commit yourself.
- Calculate your total exposure (the maximum you could lose before your stops kick in).
- Don't be tempted to gamble everything on one big bet: better to have a number of small trades open.
- Keep a mixture of down and up bets so if the market dramatically turns one way you're not cleaned out.
- Spread the risk: consider trading on exchanges around the world and on a variety of instruments such as commodities, stock markets, shares etc.
- Make sure your account is regulated by the FSA.
- Don't bet on anything you don't understand.
- Never get into debt; only bet what you can afford to lose.
- Decide on your trading system and stick to it. If you are impetuous and change midstream you won't know if it works. All systems will have good and bad days but they generally come good in the end.
- If you can't see a trading opportunity that day - go to the pub or shopping or anything else except trade.
- Make sure you understand all the terms and conditions and settlement terms of your spread betting account.
- We've said it already but it is very important: always set a stop (limit orders are also useful but not essential to safe trading).
- Enjoy yourself: it can be a lot of fun!