[This is a guest post from another contributor on investing information. Readers are encouraged to use this article as an educational source and carefully consider how this information fits within their individual investment goals and risk tolerances.]
Spread betting isn’t the same thing as traditional equity investment, and they don’t often get discussed in the same circles. However, there is notable crossover between these two wealth-generating methodologies. Becoming skilled at the one will necessarily make the investor more skilled at the other.
However, these two return-yielding strategies appeal to two separate sorts of investor, usually because of income disparities when the investor is just starting out. For people who already have a lot of money, equity investment makes a great deal of sense. Company stocks are expensive, but a diversified portfolio provides reliable growth without much stress or action on the part of the investor.
For people without wealth, starting out with a meaningful stock portfolio is impossible. A new investor might have only a couple of thousand dollars with which to begin. While this can buy a nice handful of shares from a strong company, the growth potential is not sufficient to create any sort of financial independence within the investor’s lifetime, without a constant infusion of additional funds for decades, that is.
Spread betting, on the other hand, appeals to people without great wealth because the high cost of ownership is not necessary to begin. However, many of the same skills and practices of successful investment strategy apply to spread betting as well. The addition of faster, greater returns makes spread betting truly compelling to the individual who would love to have an impressive portfolio, but simply can’t afford it…yet.
So we know what spread betting is not, but we haven’t yet covered what it is. Unlike equities investment, spread bettors speculate on the price of stocks, Forex, indices, etc. without actually buying them. Instead, they deposit money into a spread betting brokerage account, locking some or all of it into contracts related to specific financial products and periods of time.
More simply put, a spread bettor picks a stock and tries to predict how its price is going to change over a specific period of time, say a week. The user will commit a certain amount of money to a spread betting contract, which will expire a week from the time it is initiated. If, when the contract term expires, the price has changed in the direction predicted by the bettor (Above a certain threshold), returns are awarded according to how much the price changed and how much money was committed to the contract.
Most spread betting brokerage sources require no minimum deposit, or require one so low that almost anyone can take part. Spread bets can be cast and resolved so quickly in some cases, that returns really can be large and fast. However, returns are not guaranteed, and bad predictions will result in loss of funds. Fortunately, there are reliable methods by which bettors can make ever-better value predictions.
Common Skills of Investors and Spread Bettors
Stock value analysis is a time-honored tradition most popularly embodied today in the methods of Warren Buffett and Charlie Munger. Value investors of this stripe analyze a company in great detail, until they understand its usefulness, inherent worth, and relationship to outside market forces. A similar form of analysis is performed by world class spread bettors, although these individuals can make profit on a stock’s price decline just as easily as its rise.
In this, spread betting works very much like shorting or going long on a stock. As the spread bettor becomes more skilled at these predictions, reliable returns will be earned and skills will develop which will make the spread bettor a great equity investor, should they ever choose to do so. Simply as a means of income, however, it is more than satisfactory.
by Alex DiMarco